Period  1Q15

Actual vs. Expectations 1Q15 net profit of RM6.2m is below expectation, accounting for 14.7% and 13.8% of our estimate and consensus’ respectively. The negative deviation can be attributed by the disappointing performance of its MLM division, which shifted focus to ‘small ticket’ items which are more affordable, resulting in worse-than-expected loss of revenue due to lower contribution of ‘big ticket’ items.

Dividends  No dividend was declared, as expected.

Key Results Highlights YoY, net profit fell 29.2% to RM6.2m on the back of lower revenue due to the weak sales of MLM division due to the reason mentioned above. The lacklustre performance also dragged down the wholesale division, resulting in lower inter-segment sales while the stronger USD against MYR further narrowed its segmental margin substantially from 39.8% to 17.8%, causing a 56% slump in segmental profit to RM2.1m.

 QoQ, net profit shrank 41.9% mainly due to the decline in MLM division, with the fasting month during the quarter also slowed down distributors. Meanwhile, the huge fall was also caused by the lower effective tax rate in the previous quarter (of 13.7% vs. 26.1% in 1Q15), as certain incomes were not subjected to tax while the Group also utilised its capital allowance.

Outlook  We are turning negative on the stock as we are disappointed with the set of results as its MLM division continued to struggle with the new product strategy of focusing on ‘small ticket’ items instead of ‘big ticket ‘items. Wholesale division is dragged down by the MLM division while the stronger USD would further erode its margin. Retail division is not foreseen to record impressive growth in view of the soft consumer sentiments.

Change to Forecasts We slashed our FY15 earnings forecast to factor in the worse-than-expected performance in MLM division. We also assume higher distribution expenses as we were too optimistic with our assumption previously. As a result, FY15 net profit was revised down by 13%. We also take this opportunity to introduce FY16E earnings, which implies 7% EPS growth.

Rating Downgrade to UNDERPERFORM (from MARKET PERFORM)

Valuation  Our TP is revised down to RM2.29 (from: RM2.47) correspondingly with the earnings cut, based on 12.6x FY15E PER. We ascribed a lower valuation of 5-year mean PER as compared to +0.5 SD of 3-year mean previously as we turned more cautious on the outlook of Hai-O.

Risks to Our Call  Weaker-than-expected USD against MYR.

 Better-than-expected recovery in consumer spending.

Source: Kenanga