Result

• Hai-O reported a net profit of RM10.0m for its 4QFY19, declining by 21.6% qoq and 38.4% yoy. Meanwhile, the group recorded quarterly revenue of RM69.9m, down 18.8% qoq and 38.4% yoy.

• For 12MFY19, the Group attained a lower topline, -28.9% and bottomline,-36.6%.

• Slightly below expectation. 12MFY19F net profits of RM47.4m matching 93.5%/93.9% of our/consensus’ full year forecast.

Comment

• Lackluster QoQ earnings. The Group recorded lower revenue, -18.8% qoq mainly due to lower sales generated from MLM division (i.e. lower number of new member recruitment and weak consumer sentiment despite the launch of incentive sales campaign in the 4QFY19) and wholesale division (i.e. higher sales during CNY festive season in 3QFY19). Besides, the Group recorded a lower PBT margin (-3.5pts qoq), affected by higher administrative expenses.

• Unfavourable YoY earnings. Again, Hai-O recognized a lower revenue as a result of weaker sales from MLM division (i.e. slowdown in new member recruitment coupled with lower sales registered) along with lower revenue from wholesale division (i.e. lower sale from Chinese medicated tonic and vintage tea). Furthermore, the Group incurred higher administrative expenses, resulting in lower PBT/PBT margin of -39.8%/-10.4ppts.

• Disappointing 12MFY19. The Group’s 12M revenue dropped by 28.9% YoY after adjustments arising from MFRS 9, MFRS 15 and lower-than-expected revenue from MLM division. However, better gross profit margin, +3.8 ppts YoY was recorded, thanks to higher margin contribution from “small-ticket” items in MLM division. Despite that, the higher CSR cost (+RM1.4m yoy), branding cost (+RM1.4 yoy) and one-off 6% rebate (+RM0.9m yoy) incurred during the period further lowered its bottom line. As such, PBT/PBT margin decreased by 37.2% yoy/-2.1ppts.

• MLM division – Business environment remains challenging. The division will continue to develop more “small ticket” items with affordable prices due to prevailing high cost of living. In addition, the Group will realign its marketing strategies by reinforcing ongoing digitalization initiatives to sustain its member base.

• Wholesale division – focus on core products. The Wholesale division will focus on its core product (ie. Chinese medicated tonic and other health and wellness products). On top of that, the division will continue to widen its product portfolio by securing more product agencies.
• Retail division – continuous expansion. The division will continue to develop more affordable house brand product and revamp its sales incentive scheme to increase the productivity of the outlet sales personnel. Looking forward, the group will also strengthen its business collaboration with Chinese physicians to complement its business.
• Stable dividend yield. The group declared a final dividend of 9sen/share, resulting total dividend of 13 sen/share. As such, this translates into a dividend yield of 5.8% based on current share price.

• Cautious outlook ahead. We opine that Hai-O’s business performance will not recover in the immediate term and might be further bogged down by MLM division on the back of lower new member recruitment coupled with high branding and marketing expenses.

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

Earnings Outlook/Revision

• We adjust downwards our earnings forecasts for FY20F by 4.7% to RM48.3 after lowering our sales assumptions for MLM division to better reflect its lower new member recruitment and lower PBT margin pursuant to higher marketing and branding expenses in FY20F. We also introduce our FY21F net earnings of RM49.8m. Our net profits for FY20F and FY21F represent growth of 1.8% and 3.1% respectively.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM2.24 (previous target price: RM2.44) following our earnings cut. Our revised target price is now based on 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 well supported by its stable dividend yield of 5.8% for FY19/20F amid unfavourable performance of its MLM division.

Source: JF Apex Securities Research - 26 Jun 2019