Result

• Hai-O reported a net profit of RM12.8m for its 3QFY19, declining by 6.0% qoq and 33.6% yoy. Meanwhile, the group recorded quarterly revenue of RM86.2m, down 6.5% qoq and 16.4% yoy.

• For 9MFY19, the Group attained a lower topline and bottomline, -26.4% and -36.1% respectively.

• Disappointing 9MFY19 earnings. The 9M result accounts for 54.1%/62.1% of our/consensus full year net earnings forecasts. We deem the result below expectations as 9M net profit traditionally accounts for c.70~80% of actual full year earnings. The lower-than-expected 3QFY19 results were mainly due to unfavourable revenue contribution from MLM division along with higher-than-expected marketing expenses.

Comment

• Weaker qoq earnings. The Group achieved lower revenue, -6.5% qoq mainly due to lower sales generated from MLM division (i.e. lower number of new member recruitment and long year-end holiday) which offset higher sales generated from retail division (i.e. CNY festive season). Besides, the Group recorded lower PBT (-7.3% qoq), affected by higher administrative expenses from overseas incentive trip sales campaign for its members.

• Lackluster yoy earnings. Again, Hai-O posted a lower revenue as a result of weaker sales from MLM division (i.e. slowdown in new member recruitment and business activities), which offset a higher revenue from retail division (i.e. CNY sale recognized in 3QFY19 vs. 4QFY18). Furthermore, the Group incurred higher branding and CSR expenses, as well as additional 6% discounts given to MLM members, resulting in lower PBT/PBT margin of 32.4%/- 4.6ppts.

• Unsatisfactory 9MFY19. After factoring the impact of MFRS 9, MFRS15 and lower-than-expected revenue from MLM division, the Group’s 9M revenue dropped by 26.4% yoy. However, better gross profit margin, +3.8 ppts yoy was recorded, underpinned by higher margin contribution from “small-ticket” items in MLM division. Having said that, the higher CSR cost (+RM1.4m yoy), branding cost (+RM1.2 yoy) and one-off 6% rebate incurred during the period further lowered its bottom line. As such, PBT/PBT margin decreased by 34.7% yoy/-2.2ppts.

• Challenging business environment ahead for MLM division. Lower new member recruitment and higher cost of living had affected the business activities of MLM division. Therefore, the Group plans to develop more “small ticket” items with affordable pricings to cater prevailing market needs.
• Continuous expansion for wholesale and retail divisions. The Wholesale division will continue to develop more Chinese medicated products and other food products to widen its product base. Meanwhile, the Retail division will strengthen its business collaborations with various strategy partners.
• Stable dividend yield. Thus far, the group has declared an interim dividend of 4sen/share for FY19. We expect the group to propose a final dividend of 10sen/share in the next quarter. As such, this translates into a dividend yield of 5.2% based on current share price.

• Unfavourable outlook ahead. In our view, Hai-O’s performance will be further dragged down by MLM division on the back of lower new member recruitment coupled with high branding and marketing expenses. On the other hand, lower sales will be recorded for retail division in next quarter as higher sales from CNY festive season was recognized in this quarter.

• Risks include: 1) Higher than expected operating expenses (ie. higher marketing expenses) 2) lower than expected domestic spending due to higher cost of living.

Earnings Outlook/Revision

• We slash our earnings forecasts for FY19F and FY20F by 26.6% and 38.1% to RM50.7m and RM51.7m respectively after lowering our sales assumptions for MLM division to better reflect lower new member recruitment and lower PBT margin pursuant to higher marketing expenses.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM2.44 (previous target price: RM3.00) following our earnings cut. We also rollover our valuation to FY20F. As such, our revised target price is now based P/E multiple of 13.5x FY20F EPS, which is at its 3-year historical mean P/E.
• We remain neutral on Hai-O as we believe current share price is supported by its stable dividend yield of 5.2% for FY19/20F amid prevailing headwind for its MLM segment.

Source: JF Apex Securities Research - 26 Mar 2019