Period  2Q14/1H14

Actual vs. Expectations Below expectations. Hai-O reported 2Q14 net profit of RM10.5m (+20% QoQ, -35% YoY), bringing its 1H14 NP to RM19.3m (-27% YoY) which made up 37% and 38% of our and the consensus full year estimates, respectively. The key culprits were: (i) lower-than-expected sales growth and (ii) margins erosion due to the weakening of Ringgit against USD.

Dividends  Within expectation. 4 sen interim single tier and 2 sen special single tier dividend were declared in the quarter which is similar to last year payout of a total 6 sen interim single tier dividend.

Key Result Highlights YoY, the 2Q14 net profit dropped by 35% YoY on the back of flattish revenue. MLM segment saw a slight decline in revenue (-3% YoY) due to the tightening of household credit by the government which has caused a drop in the sales of big ticket items. The huge decline in net profit was mainly attributed to the higher costs of goods sold and margin erosion.

 YoY, PBT margins declined by 9 ppt (from 31.3% to 22.3%) due to the fluctuation of USD/MYR rate. As 40% of their products are imported, a weakening of Ringgit against USD would lead to higher imported cost of goods sold. In the reporting quarter, USD strengthened by 4.8% YoY (3.23 in 2Q14 vs. 3.08 in 2Q13).

 QoQ, the group recorded higher revenue and net profit (+20% YoY), mainly attributable to the higher contribution from MLM and retail division. The change of marketing strategy in the MLM division received good response from existing distributors and new members which spur higher sales of “small ticket” items in the corresponding quarter. The retail segment is also starting to turn around from a loss in the previous quarter, underpinned by higher sales generated from members’ sales promotion.

Outlook  We remain positive on Hai-O’s prospect as we anticipate its MLM segment will continue to deliver decent earnings growth from a lower base through its continuous effort to enhance its product mix and expand market channels through the recruitment of more new members.

 The focus on small ticket items will attract more new members as it requires lower initial capital costs.

 The attractive net dividend yield backed by the company’s strong balance sheet should limit the downside risk of the stock.

Change to Forecasts We have slashed our revenue assumption by 6.0% and 7.6% in FY14E and FY15E respectively to factor in the lower sales forecast of its MLM and retail segments.

 We also trimmed down our GP margin assumptions by 2.5 ppt, taking account the rising USD/MYR outlook.

 Consequently, both of our FY14 and FY15 net profit forecasts have been lowered by 11%.

Rating Maintain OUTPERFORM

Valuation  Post result, we have lowered our TP to RM2.95 (from RM3.00 previously) after rolling forward our valuation base year to FY15 with unchanged targeted PER of 11.8x.

Risks to our Call Further weakening of Ringgit against USD

 Slowdown of consumers spending in the domestic market

Source: Kenanga