Result

• Hai-O posted a net profit of RM7m during first quarter of FY22, down 14.6% qoq and 32% yoy on the back of sluggish revenue which declined 26.5% qoq and 31% yoy.
• Below forecast. 1QFY22 net profit of RM7m lags behind our in-house and market expectation, only accounts for 17.4% and 17.1% of full year earnings forecast respectively. The lower-than-expected result was dented by lower sales from all of its segments resulted from various phases of movement control order (MCOs).

Comment

• Restricted movement order held back QoQ growth. Revenue deteriorated 26.5% qoq, no thanks to MCOs which resulted in sluggish performance of all of its segments. MLM segmental revenue declined 23.9% qoq following subdued sales as physical marketing activities were unable to take place during lockdown. Additionally, Ramadan fasting month and Hari Raya festive season which fell during this quarter also further dampened the Group’s revenue as sales were traditionally muted during these seasons. Besides, revenue for Wholesale and Retail segments were down by 32.9% qoq and 28.4% qoq respectively due to higher base. Also, delivery of non-essential goods was disallowed during MCOs period coupled with poor customer traffic and limited business hours also led to disappointing sales. Nevertheless, the Group’s PBT picked up slightly by 2.1ppts qoq, spurred by lower operating costs due to cost optimization measures.
• Better sales mix and price adjustment from Wholesale segment lifted YoY gross margin despite muted sales. Hai-O revenue eased 31% yoy following subdued sales from MLM segment (revenue:-39.1% yoy), Wholesale segment (revenue:-18.2% yoy) and Retail segment (revenue:-7.6% yoy) pursuant to various phases of lockdown. Besides, lower number of member recruitment for MLM segment and weaker contribution from online sales from Retail segment further weighed down the Group’s performance. However, it was offset by improved gross margin from Wholesale segment arising from favourable sales mix and price adjustment as well as higher PBT margin from Retail segment (+4.2ppts yoy).
• Soothing outlook for FY22. Looking forward, the Group remains cautious on its outlook, which might be impacted by Covid-19 that affected overall business growth. Hai-O is committed on several proactive measures and continues to strengthen its position as a premier healthcare player such as emphasizing on online platforms as well as reinforcing of digital adoption for marketing and selling products which applied for all of its segments. Also, the Group will focus more on affordable range of health products as well as to implement strategies to penetrate youngster market. Overall, we expect the Group’s business to go through stiff operating environment despite some relaxation of economic activities as we expect consumer sentiment to remain weak at this juncture resulted from lower contribution from its online platform segments.

Earnings Outlook/Revision

• We tweak down our FY22F and FY23F full year earnings forecasts by 13.6% and 15.3% respectively to RM34.8m and RM37.6m to account for lowerthan-expected margin and sales.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM1.86 (RM2.13 previously) following our earnings downgrade. Our revised target price is now based on P/E multiple of 16x FY22F EPS of 11.6 sen (13.4 sen previously), which is slightly higher than 5-year mean PE of 15.3x. We deem the stock is fairly valued and share price is well supported by its decent dividend yield of over 4.5% for FY22F.
• Risks include: 1) Higher-than-expected operating expenses (i.e. higher marketing and branding expenses), 2) Lower-than-expected domestic spending due to higher cost of living, 3) Perpetual COVID-19 pandemic which weigh down overall business performance.

Source: JF Apex Securities Research - 29 Sept 2021