Result

• Hai-O reported a net profit of RM21.4m for its 2QFY18. The quarterly net profit improved by 20.0% QoQ and 34.8% YoY. Meanwhile, the Group recorded quarterly revenue of RM123.5m, flattish QoQ, -0.8, while increased 23.8% YoY.

• For 1HFY18, the Group attained a higher topline and bottomline of 39.0% and 53.2% YoY respectively.

• 1HFY18 net profit was deemed within expectations. The Group’s 1HFY18 net profit of RM39.3m accounted for 46.7% of market forecast and 44.1% of our full year estimate. Nevertheless, we believe that Hai-O’s 2H net earnings will be stronger and hence able to meet our full year earnings expectation on the backdrop of festive seasons.

Comment

• Better earnings QoQ. The Group reported a higher PBT margin, +4.0 ppts in 2QFY18 as compared to 1QFY18. The improvement was due to wider use of social media and market digital platforms resulted in the operating efficiency from MLM division. Besides, the Wholesale and Retail divisions also posted better results with respective PBT increased by 3.6% and 82.4%.

• Lower MLM sales. However, the QoQ revenue was flattish with lower sales generated by MLM division, -6.7% mainly due to early purchase by its members during 25th year anniversary grand sales promotion in 1QFY18. However, overall group’s sales were partly aided by higher revenues generated from the Wholesale division and Retail division.

• Higher top line contributions from the Wholesale and Retail divisions. The Wholesale division achieved higher revenue of 26.3% driven by higher contribution from sales of Chinese medicated tonic and patented medicine. Meanwhile, the Retail division recorded an increase of 27.8% for its revenue, thanks to half-yearly members’ sales promotion campaign.

• Stronger earnings YoY. The increase was mainly contributed by MLM division thanks to higher recurring sales of consumer products, personal care products with household products contributed more than 70% of total sales, as well as its 25th year anniversary grand sales promotion. Moreover, the Wholesale division posted a revenue and PBT increase of 40% and 169.6% respectively, underpinned by higher sales generated from Chinese medicated tonic.

• Higher 1HFY18 earnings contributed by all three main divisions. Likewise, the better performance of the Group’s 1HFY18 earnings were mainly attributable to higher sales pursuant to its 25th year anniversary grand sales promotion and others sales promotion campaigns.

• Dividend declared. The Group has declared a single tier interim dividend of 6 sen/share.

• Positive Outlook. The Group is optimistic on its 2HFY18 banking on: 1) MLM division will continue to develop more new products especially lifestyle range of products and beverage products in the next quarter; while new members recruitment and retention programs still remain vibrant as one of the on-going activities; 2) Wholesale and Retail divisions will continue to carry out extensive CNY promotion campaign as Chinese New Year (CNY) festival is approaching; and 3) The Group continues to leverage on Digital marketing platform for its MLM ecosystem and hence further improve its operational efficiency and margins.

Earnings Outlook/Revision

• We maintain our earnings forecast for FY18F and FY19F as we believe that the Group will generate higher earnings as 2HFY18 is a seasonally stronger period.

Valuation & Recommendation

• Maintain BUY with a higher target price of RM6.41 (previous target price: RM5.23) as we roll over our valuation to FY19F. Our revised target price is now pegged at 17.5x FY19F (+1.5 SD above mean) based on EPS of 36.6sen.
• We favour Hai-O for its: 1) strong earnings growth trajectory, 2) sturdy balance sheet with net cash position, 3) resilient sales unfazed by prevailing high cost of living, 4) strong brand name among Malaysian household, and 5) stable profit margin with effective cost rationalization.

Source: JF Apex Securities Research - 19 Dec 2017