Result

• Hai-O reported net earnings of RM17.6mill in 1QFY18, slightly down 3.2% qoq but surged strongly by 86.2% yoy. Meanwhile, revenue stood at RM124.5mill, up 5.2% qoq and 58.3% yoy.

• A marvelous start of the year with results above expectation. We were positively surprised with its 1QFY18 net profit which made up 26% of our full year earnings expectation. We deem the results above expectation as 1Q is seasonally weaker quarter. The strong earnings were mainly driven by the MLM and Wholesale divisions.

Comment

• MLM division continued to be the main driver. MLM contributed a substantial growth in 1QFY18 on yoy basis. The increase in sales boosted by its “big ticket items” comprise of fashion & garment. The recurring sales from the “small ticket items” such as food & beverages, personal, skincare and house care product also contributed to the total sales volume and margin. The division recorded higher yoy revenue and PBT of 81% and 94% respectively. In addition, the higher number for new member recruitment also lifted the performance of MLM division.
   

Earnings Outlook/Revision

• We revise upwards our earnings forecast for FY18F by 30.0% to RM89.3m from RM68.7m as we anticipate stronger sales momentum from its MLM division. We also introduce our FY19F of RM109.9m. Our net profits for FY18F and FY19F represent commendable yoy growth of 50.7% and 23.1% respectively.

Valuation & Recommendation

• Upgraded to BUY from HOLD with a higher target price of RM5.23 (previous: RM4.70) after the earnings upgrade and applying higher target PER. Our target price is now pegged at 17.5x FY2018F PE (+1.5sd) based on EPS of 29.9 sen. We believe our valuation for Hai-O is justified as assigned PE is at 10% discount to the market leader, Amway which now trades at 19.5x forward PE.

Source: JF Apex Securities Research - 21 Sept 2017