Period  3Q14/9M14

Actual vs. Expectations Hai-O reported 3Q14 net profit of RM10.4m (-1% QoQ, -5% YoY), bringing its 9M14 NP to RM29.7m (-20% YoY). The results were below expectations, at only 64% of both our forecast and the consensus full year estimates. The main culprit for this earnings miss was largely due to the weaker-than-expected sales in the MLM division.

Dividends  No dividend was declared for the quarter, as expected.

Key Result Highlights YoY, group revenue rose by 5% due to more favourable sales in the wholesale (+8%) and retail (+21%) segments, where the CNY festive season fell in the current reporting quarter, as opposed to the 4th quarter of last financial year. However, the improvement in revenue was eroded by the weakening of Ringgit against USD, and higher operating costs. Consequently, PBT margin was compressed by 2.3ppt, to 19.8% in 3Q14.

 QoQ, 3Q14 revenue grew by 9% while NP was flat at -1%. Apart from the above-mentioned factors, the revenue in the MLM division decreased marginally by 3% to RM38.5m, as the division has just completed its incentive trip campaign promotion in October 2013. Hence, sale post campaign was slower in the following months.

 YTD, 9M14 revenue was flat at -1% while NP declined by 20%. This was mainly due to: (i) weaker-than-expected sales for the MLM segment in 1Q14, (ii) GP margin erosion on the weakening Ringgit against USD, and (iii) escalating operating cost and higher A&P spent on the wholesale and retail segments.

Outlook  While we are positive on HAIO’s longer-term prospects as its MLM division is intensifying its product strategy by focusing on more “small ticket” items, which are affordable, the rise in operating cost and the depreciation of Ringgit would continue to affect their margins, going forward.

Change to Forecasts   We have trimmed our FY14-15E revenue forecasts by 5.1% and 4.6%, respectively, to normalise our previous overly aggressive growth assumptions in the MLM segment.

 At the same time, we have assumed higher operating expenses for FY15. Consequently, our FY14 and FY15 net profit estimates have been lowered by 11% and 16%, respectively.

Rating Downgraded to MARKET PERFORM

Valuation  Our previous TP of RM2.95 has been reduced to RM2.47 following the earnings revision. This implies an unchanged PER valuation of 11.8x over FY15E EPS of 21.0 sen.

Risks to our Call    Further weakening of Ringgit against USD.

 Slowdown of consumers spending in the domestic market.

Source: Kenanga