• Hai-O registered a net profit of RM7.6m during 3QFY20 which increased 4.1% qoq but depleted 40.6% yoy. Meanwhile, revenue diminished 2.0% qoq and 22.2% yoy.

• As for 9MFY20, the Group recorded a net profit of RM22.7m during this period, which tumbled 39.3% yoy on the back of sluggish revenue of RM201.5m, - 22% yoy. The subdued results were dented by poor results from all of its segments in view of lower sales and higher cost incurred.

• Marginally below expectations. 9MFY20 net profit of RM22.7m is below our and consensus expectation, only accounting for 68.1%/69.1% of our/consensus full year expectation.

Comment

• Massive drop in MLM segment bogged down QoQ revenue despite improved earnings. The Group’s revenue slid 2.0% qoq due to uninspiring sales from MLM division which dropped 13.8% qoq. However, revenue from Wholesale and Retail division rose +11.3% qoq and 27.8% qoq respectively arising from better sales during Chinese New Year (CNY) festive season campaign. Moreover, PBT increased 15.2% qoq, thanks to improved margins from Wholesale and Retail segments.

• MLM segment continued to deteriorate on YoY basis. Hai-O’s revenue and PBT were down 22.2% yoy and 35% yoy respectively during 3QFY20. The disappointing performance was due to lower sales from all segment [MLM:-34.8% yoy, Wholesale:-1.2% yoy and Retail:-1.6% yoy] due to lack of incentives to the members during this period as well as poor consumer sentiment amid current economic condition. Moreover, lower earnings were dented by MLM division coupled with Wholesale division due to unfavorable change in sales mix as well as higher import cost following strengthening Chinese Yuan against Malaysian Ringgit which led to the above segments’ PBT margins dropped by 6.1pptts and 2.8ppts respectively.
   
• Subdued 9MFY20. Cumulatively, Hai-O’s 9MFY20 revenue and PBT dropped 22% yoy and 38% yoy respectively due to lower contributions from MLM, Wholesale and Retail segments on the back of soothing consumer spending and higher cost incurred.
   
• Unattractive outlook ahead. The Group remains pessimistic about the company’s outlook amid current economic condition coupled with pandemic outbreak which dampened overall consumer sector. As the entire segments being deteriorated by weak consumer sentiment, the Group committed to emphasis on several strategies for their business. Looking forward, we expect the Group’s operating outlook will be challenging in the immediate term and might be further bogged down by MLM division on the back of lower new member recruitment and member renewal amid lack of incentives campaign as well as uninspiring consumer demand towards its core products (i.e. Chinese medicated tonic and other health and wellness products).

• Dividend declared. The Group has declared a second single-tier interim dividend of 3sen/share for FY20, which constitutes 54.5% of our full year FY20 dividend forecast.

Earnings Outlook/Revision

• We cuts our earnings forecasts for FY20F and FY21F by 13.3% and 21% to RM28.8m and RM32.8m respectively, 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.

Valuation & Recommendation

• Downgraded to SELL from HOLD with a lower target price of RM1.00 (previous target price: RM1.93) following our earnings cut. We roll over our valuation to FY21F, based on P/E multiple of 9.2x FY21F EPS of 10.9sen which is -1 SD of 3-year historical mean PE of 13.4x.

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

Source: JF Apex Securities Research - 26 Mar 2020