Result

• Hai-O’s 2QFY17 net profit was recorded at RM15.9mill, which increased 63.3% qoq and 77.9% yoy. Similarly, quarterly revenue posted a positive growth of 26.8% qoq and 35.6% yoy.

• For 1H2017, net profit was registered at RM25.7mill, soaring 64.8% y-o-y. Meanwhile, revenue expanded by 38.4% y-o-y to RM178.4mill.

• Above expectations- 6MFY17 net profit reached 58% and 60% of our full year net earnings forecast and consensus respectively. The encouraging results were mainly attributed by better performance from its MLM division.

Comment

• Another robust growth from MLM division for this quarter. MLM division’s PBT increased both yearly and quarterly bases thanks to additional sales from its key beverage products following the successful launch of its rebranding campaign activities in the 1st quarter. Furthermore, rising new recruited members in this quarter coupled with positive response from the incentive trip promotional campaign also contributed to the inspiring performance of its MLM division.

• Similarly, 6MFY17 PBT for MLM increased by 91% yoy, mainly attributable to strong recurring sale of the small-ticket items. In addition, the division has successfully recruited new members to participate in MLM business. Besides, full commission of the new “Customer Relationship Management” system which provides E-commerce platform has been widely used by the distributors, which helped to increase their sales, productivity and efficiency.

• Wholesale division’s pre-tax profit improved during this quarter……..Wholesale segment’s PBT posted a positive yoy and qoq growth aided by higher margins contribution from tea segment and inter-segment sales. Likewise, the division’s PBT increased by 32.4% yoy for 1HFY17.

• ………..However, the division registered lower revenue yoy and qoq mainly due to lower overall sales generated from duty-free goods and Chinese medicated tonic as most of the medical halls reduced their stockholding level since the increase in selling prices early this year.

• Retail division made a turnaround in 2QFY17……

Retail division managed to register a positive PBT number

in 2QFY17 against net loss of RM0.54mill in last quarter in line with positive topline mainly supported by effective members’ sales promotional campaign carried out in this quarter. Despite continuous weak consumer sentiment, the continuous support from Hai-O members enabled to lift its revenue by 30.1% qoq.

• …….But still down in 1HFY17. Nevertheless, the PBT of retail division during 1HFY17 declined due to higher operating costs and lower A&P income subsidy from suppliers, coupled with lower sales of the high-margin house-brand products.

• Proposed bonus issue. The Group has proposed a bonus issue of 1 bonus share for every 2 existing Hai-O shares with the entitlement date to be determined later. This is to reward shareholders and improve its share liquidity.

Earnings Outlook/Revision

• We revise upwards on our earnings forecast for FY17F by 5.6% following the surge in sales in 2QFY17 while we foresee sales momentum would soften for the remaining of the year. We also adjust upwards of our earnings forecast for FY18F by 3%.

Valuation & Recommendation

• Maintain HOLD on Hai-O with a higher target price of RM3.75 (previous target price was RM3.22) as we roll over our valuation to FY18F and pegged at 14x FY18F EPS which is +1SD above its 3 year mean PE. Current valuation looks steep as we deem that share price has factored in the positives. However, current share price could stay elevated and well supported by the positive news of Bonus issue.

Source: JF Apex Securities Research - 22 Dec 2016