Period

2Q16/1H16

Actual vs. Expectations

1H16 net profit of RM15.4m (+14.8% YoY) met expectations, matching 49.2% of our in-house forecast and 48.7% of the consensus.

Dividends

As expected, DPS of 4.0 sen (1H15: 4.0 sen) was declared. We forecast DPS of 12.0 sen for FY16.

Key Results Highlights

YoY, 1H16 revenue jumped 20.0% to RM129.0m, mainly driven by strong growth achieved in MLM division (36.4%) as the strategy of focusing on ‘smallticket’ items bore fruit, further aided by an aggressive recruitment program. 1H16 operating profit grew 14.1% to RM20.2m, also attributed to the encouraging performance in MLM division, which recorded operating profit of RM13.4m, up 21.9% from 1H15, in line with the higher sales. As a result, 1H15 net profit increased by 14.8% to RM15.4m.

QoQ, 2Q16 revenue surged 32.9% to RM73.6m thanks to growth across all operating division on the back of lower base as 1Q16 was negatively affected by the GST implementation. Wholesale division registered overwhelming revenue growth of 81.9% to RM16.8m, driven by the extensive promotion program to mitigate the soft consumer sentiment post-GST implementation. 2Q16 operating profit grew 31.7% to RM11.5m, mainly contributed by the MLM division (+14.3%) on the back of higher sales (+24.0%). As a result, 2Q16 net profit surged 34.9% to RM8.9m, further helped by the normalization in effective tax rate to 24.1% from 25.8% in 1Q16.

Outlook

Outlook remains challenging with the biggest concern being the wholesales division due to the strong USD against MYR. With the USD remaining strong, the Group might face difficulty in sustaining profits in this division.

The strategy of realigning the sales to focus on ‘smallticket’ items has gained traction with such items now contributing >60% over total sales while the revenue growth momentum was also seen to be picking up. However, we remain cautious on the outlook in the MLM division in view of the weak local consumer sentiment.

Overall, we still maintain our negative stance on HAIO despite the improving MLM division’s performance in view of the pedestrian growth forecasted for the next two years (4.0% and 7.3%) and the risk in the wholesale division.

Change to Forecasts

No changes to our earnings forecasts.

Rating

Maintain UNDERPERFORM

Valuation

Our Target Price was unchanged at RM2.22, based on 12.9x PER FY17E, which is on par with its 5-year mean. The valuation is justified by its generous dividend pay-out (c.75% of net profit) which translates into yield of >5%.

Risks

Stronger-than-expected MYR recovery against USD.

Sector risk: Better-than-expected consumer sentiment.

Source: Kenanga Research - 17 Dec 2015