Period
4Q14/FY14

Actual vs. Expectations Hai-O reported 4Q14 net profit of RM10.8m (+3% QoQ, +9% YoY), which bring its FY14 NP to RM40.5m (-14% YoY). The results were well within expectations, accounted for 98% and 97% of our forecast and consensus estimates, respectively.

Dividends
A final single tier dividend of 10 sen (2013: 8 sen single tier dividend) has been declared in the current quarter, bringing the full-year dividend to 14 sen per share vs. our earlier projection of 12 sen.

The variance in dividend projection was due to a higherthan- expected payout (68% of PATAMI) in the current financial year vs. 60% payout ratio in FY13.

Key Result Highlights   QoQ, 4Q14 revenue declined by 14% due to an unfavourable sales in the wholesale (-26%) and retail (- 31%) segments. This was mainly due to the absence of CNY sales boost, which fell in 3Q14 coupled with a more cautious consumer spending environment in the current quarter. In contrast, the group NP grew by 3% QoQ due to lower operating costs incurred in the MLM division and a lower effective tax rate (13.7% vs. 24.9% in 3Q14).

YoY, FY14 revenue dropped by 5% mainly due to weaker sales performance in the MLM division (-11%). As mentioned earlier, this is the first year where the group is switching its product strategy by focusing on “small ticket” items, which are more affordable. This may have an unfavourable impact to the bottom line as the profit contribution from “small ticket” items is lower as compared to “big ticket” items.

The lower revenue coupled with the GP margin erosion (- 2.1ppt) on the weakening Ringgit against USD and a higher operating cost environment has caused the group’s FY14 NP to fall by 14% YoY.

In FY14, HAIO has successfully reduced its overdependency on “big ticket” items. Revenue contributed by the “big ticket” items was reduced from 72% in FY13 to 52%.

Core distributor force (CDF) has also increased by c.22% due to lower initial capital costs required to start up the business.

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 weakening Ringgit would continue to affect their margins, going forward.

Change to Forecasts  No changes to our FY15E estimates.

Rating  Maintain MARKET PERFORM

Valuation
Our TP remains unchanged at RM2.47 based on a targeted FY15 PER of 11.8x (implies +0.5SD above its 3- year historical average PER).

Risks to Our Call Rising oprerating costs. Further weakening of Ringgit against USD. Slowdown of consumers spending in the domestic market.

Source: Kenanga