• Hai-O reported a solid set of results, with 1QFY21 core net profit at RM9.9m (+27.6% yoy) tracking ahead of our and street expectations.
• The earnings surprise was predominantly driven by a successful MLM sales campaign, on top of continual cost optimisation initiatives across the board.
• We lift our earnings estimates by 3-34% for FY21-23E and upgrade Hai-O to a HOLD with a higher TP of RM1.93.

Core Net Profit at RM9.9m; Above Expectations

Hai-O’s 1QFY21 revenue rose 7.8% yoy to RM71.2m, underpinned by higher MLM sales of RM49.3m (+17%). This partly comes on the success of its “Duit Raya” sales campaign and strong sales from its newly launched lady-wear items during the period. On the flipside, the wholesale (-11%) and retail (-3%) divisions slightly negated the strong MLM performance, as both were affected by operational constraints during the CMCO/RMCO. Meanwhile, EBITDA margin expanded 3ppt yoy to 20.7%, benefitting from: i) effective cost optimisation; ii) favourable sales mix for MLM and wholesale; and iii) rental rebates for its retail outlets. Consequently, core net profit grew 27.6% to RM9.9m, tracking ahead of our (40%) and the street’s (37%) full-year expectations. Variance against our estimates was due to higher-than-expected MLM sales and margins.

Intensifying Marketing Events to Support Sales

Sequentially, revenue and core net profit grew +32.7% and 3.3% respectively – rebounding from preceding quarter’s low base due to MCO. Moving forward, focus for the group will be on enhancing digital marketing strategies across all segments, to capture opportunities amid the new normal. In the coming quarters, more marketing events are on the cards for MLM, such as: i) local incentive trips to reward members; ii) monthly flash sales; and iii) free member fees campaign. The wholesale division will collaborate with key clients to offer sales promotions while the retail division will launch its half-yearly sales campaign and step up sales promotions through various ecommerce platforms.

Upgrade to HOLD

In light of the better-than-expected results, we lift our earnings estimates by 3-34% for FY21-23E, largely to account for higher MLM sales and overall lower opex. After rolling forward our valuation base year to FY22E, we derive a higher 12-month TP of RM1.93, pegged to a lower FY22E 16x PER target (1SD below its 3-year mean, from 20x) to better reflect the prolonged challenges in the business environment amid the pandemic. Upgrade to HOLD in view of a potential upside of 7.5% to our new TP.

Key Risks

Up/downside risks: i) recovery/fall in MLM distributor base; ii) better-/worse-than-expected takeup rate for its new products; and (iii) higher/lower cost savings.

Source: Affin Hwang Research - 30 Sept 2020