Period  1Q14

Actual vs. Expectations  1Q14 net profit (NP) of RM8.8m came in below the street and our estimate of RM51.2m and RM52.2m, respectively; making up only about 17% of both estimates. The underperformance was mainly due to the lower sales during the Ramadan month and higher base effect from aggressive promotions in the previous quarter.

Dividends  No dividend was declared in the quarter.

Key Result Highlights  QoQ, 1Q14 revenue declined by 24%, of which a 4% improvement in the wholesale division was insufficient to cushion the decline in multi-level marketing “MLM” (-27% QoQ), retail (-42% QoQ) and others (-9% QoQ). In line with the fall in revenue, its PBT and NP decreased by 20% and 13% QoQ respectively. MLM saw a major drop in sales due mainly to the incentive trip campaign promotion which took place in 4Q13, which had boosted the sales to register a record high in FY13. As a result, the 1Q14 sales shrunk post promotion coupled with a longer 21-day month with Ramadan falling within the quarter. On the other hand, retail sales fell drastically due to the absent of CNY festive season coupled with year-end members’ sales that generated higher revenue in previous quarter.

 YoY, its 1Q14 revenue dropped by 10% on the back of the decline in MLM (-17% YoY), retail (-7% YoY) and others (-17% YoY) despite a 10% increase in wholesale revenue. As mentioned above, MLM suffered in the quarter mainly due to the special price promotion on foundation garments in FY13 despite additional sales generated from the new wellness and health food products, which are small ticket items compared to the foundation garments. Its PBT and NP moved in line with revenue and dropped by 15% and 14% YoY, respectively. The substantial decline was caused by EBIT margin compression in MLM (-2.6ppts YoY) and a loss in the retail segment. The company saw weakening of domestic purchasing power which results in lower demand in retail division. In addition, due to higher operating costs such as rental, the division slipped into the red for the quarter.

Outlook  The company will continue to introduce new products in the 2Q14 for its MLM division and is in the midst of introducing trip incentive program for distributors and reintroducing special price promotion for one of its key products. Hence, we remain positive on Hai-O’s prospect as we anticipate its MLM segment to continue delivering decent earnings growth from a lower base through its continuous effort to enhance its product mix and expand new market channels through the recruitment of more members.

Change to Forecasts  We believe the underperformance was just a timing issue. Hence, we are maintaining our earnings forecasts for now.

Rating   Maintain OUTPERFORM

Valuation  We are maintaining our TP of RM3.00 based on an unchanged PER of 11.8x over FY14E EPS of 25.8 sen.

Risks to our call  Weakening purchasing power and Ringgit.

Source: Kenanga