Another Lackluster Quarter

Hai-O posted another weak set of results. 6MFY20 net profit declined 38.8% largely on the back of continued weakness in the group’s MLM business, while its wholesale and retail segments underperformed against the backdrop of softer consumer spending. We cut our FY20- 22E earnings by 5-15% in view of the more lacklustre outlook going forward. As such, we lower our TP to RM1.50 (from RM1.60 previously) and maintain our SELL rating.

Weakness in MLM Weighs; Below Expectations

Hai-O’s 6MFY20 revenue declined 21.9% yoy to RM134.5m on the back of declines seen in the group’s three main segments: Multi-level marketing (“MLM”) (-30.2% yoy), Wholesale (-2.4% yoy) and Retail division (-3.6% yoy). MLM in particular continued to suffer from overall weakness in consumption spending while members’ recruitment and renewal were also affected. The EBITDA margin contracted 3.3ppt as a result of unfavourable sales mix coupled with higher import purchase cost. All in, the group posted net profit of RM15.1m (-38.8%) for 6MFY20. This was below our and consensus expectations, accounting for 42% of respective forecasts. The variance to our forecast was mainly due to the lower-thanexpected contributions across all segments.

Better Sales Sequentially But Margin Narrowed

Sequentially, top-line sales were marginally better at RM68.4m (+3.5% qoq). The MLM division saw higher sales of big-ticket items (above RM500) whereas the wholesale segment saw better sales from Chinese medicated tonic and bird-nest products. The retail division sales received a boost from its half-yearly grand sales campaign during the quarter. Nevertheless, a lower margin due partly to an unfavourable sales mix and higher branding costs led to a profit decline qoq to RM7.3m (-5.5%).

Maintain SELL

We cut our FY20-22E EPS estimates by 5-15% respectively, mainly to factor in the overall weaker consumption spending, particularly on discretionary items. In tandem with our earnings cut, our TP is now revised lower to RM1.50 (from RM1.60) based on an unchanged target of 12x PER. While we expect some uptick in sales next quarter (riding on the Lunar New Year festive spending), especially from the Wholesale and Retail divisions, longer-term prospects remain challenging for the MLM business. All in, given the potential downside to current share price, we maintain our SELL rating. This note marks a transfer of analyst coverage.

Upside risks: i) recovery in MLM distributor base; ii) better-than-expected take-up rate for its new products; and (iii) higher cost savings

Source: Affin Hwang Research - 19 Dec 2019