Hai-O posted FY20 revenue and core net profit of RM255.2m (-22.3% yoy) and RM32.2m (-32.5% yoy) respectively. The core net profit tracked ahead of our and consensus expectations, accounting for 117% and 115% of respective estimates. We lift our FY21-22 earnings forecasts by 26-28%, mainly to factor in lower operational costs. In tandem, we raise our TP to RM1.65 (20x FY21E EPS). Notwithstanding better cost containment, we expect the upcoming quarters to remain challenging amid a frail macro backdrop which could have an extended impact on discretionary spending. Maintain SELL.

FY20 Core Net Profit at RM32.2m, Ahead of Expectations

Hai-O’s FY20 revenue declined 22.3% yoy to RM255.2m, mainly led by a decline in MLM to RM156.7m (-30% yoy) as the segment continued to be weighed down by lacklustre consumption spending. Meanwhile, the wholesale and retail segments fell to RM57.4m (-2.5% yoy) and RM36.7m (-9.5% yoy) respectively, owing to lower sales of medicated tonics for the former and MCO disruption to retail outlets for the latter. All in all, core net profit came in at RM32.2m (-32.5% yoy) for FY20, tracking ahead of our (117%) and consensus (115%) expectations. The variance to our expectation was largely due to lower-than-expected opex. A final DPS of 4sen was proposed, bringing total DPS to 10sen for FY20 (FY19: 13 sen).

Better Cost Containment Lifted 4QFY20

Sequentially, revenue was down 20% to RM53.7m but core net profit improved 26% to RM9.6m, as the EBIT margin expanded 4ppt to 20% – benefitting from efficiencies by leveraging on technology and social media on top of other broad-based cost optimisation measures. Heading into FY21, while we are encouraged by continual cost optimisation and the group’s increasing penetration into online avenues, we retain our cautious stance in the face of lingering uncertainties amidst Covid-19, which could have an extended impact on consumption spending patterns.

Maintain SELL

We lift our FY21-22 earnings forecasts by 26-28%, mainly to account for lower operational costs. Our TP is revised higher to RM1.65 based on an unchanged target PER of 20x (5-year mean) on our FY21E EPS. We maintain our SELL rating as we expect earnings delivery to remain volatile in upcoming quarters amidst a challenging business environment. 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 - 30 Jun 2020