1QFY21 net profit of RM10.3m (+33% YoY, +7% QoQ) came in at 29%/39% of our/consensus full-year estimates. We deemed the results to be within our expectation as we expect slower sales ahead with the ending of Hari Raya sales campaign which we believe is the biggest campaign of the year. Due to the lack of investors’ interest and low stock liquidity, we are ceasing active coverage on HAIO for now. The stock is now assigned Not Rated (from UNDERPERFORM), with our last TP of RM1.20, based on 10x FY21 EPS (at its -1.0SD of 5-year forward historical mean).

1QFY21 within our expectation. 1QFY21 net profit of RM10.3m (+33% YoY, +7% QoQ) came in at 29%/39% of our/consensus full-year estimates. We deemed the results to be within our expectation as we expect slower sales ahead with the ending of Hari Raya sales campaign which we believe is the biggest campaign of the year. No dividend was declared for the quarter, as expected.

YoY, 1QFY21 net profit surged 33% mainly from: (i) expansion in EBIT margin by 3.9ppt to 19.0% from 15.1% in 1QFY20 with improved cost optimization measures especially toward digitalisation, (ii) higher revenue (+8%) thanks to the success of the “Duit Raya” sales campaign launched in June 2020 and the overwhelming response for one of its newly launched lady-wear items under MLM segment (+17%), and (iii) lower effective tax rate of 25.1% (1QFY20: 26.2%). All these more than offset the weaker sales from other segments namely: (i) Wholesale (-11%), reflecting constraints due to RMCO (Recovery Movement Control Order) restrictions where higher revenue generated from Chinese medicated tonic and premium cooking wine was offset by lower revenue from Western liquor and tea during the quarter, and (ii) Retail (-3%) members’ sales campaign was less encouraging, as subdued consumer sentiment was aggravated by the extended physical distancing measures during the RMCO.

QoQ, 1QFY21 net profit increased 7%, slower than sales growth (+33%) mainly due to normalisation in effective tax rate to 25.1% (4QFY20: 14.7%) as the group recognised the reversal of tax overprovision in 4QFY20. Furthermore, the EBIT margin slightly contracted by 1.2ppt to 19.0% from 20.2% in 4QFY20 from the “Duit Raya” sales campaign costs vs none last quarter.

Outlook. We expect to see slower distributors’ growth (averaging at 120k, plunging from the highest level in FY18 at 160k distributors) amidst the economic uncertainties. The MLM division will develop more “small ticket” items at affordable prices to cater for market needs and reinforce on-going digitalization initiatives. The Wholesale and Retail divisions will focus on its core products, and will continue to widen product portfolio. Moving forward, the group will continue to optimise costs, re-strategize business plans, and further strengthen existing digital infrastructure, enhancing presence in social media and digital advertising.

Ceasing coverage. Due to the lack of investors’ interest and low stock liquidity, we are ceasing active coverage on HAIO for now. Should its outlook improve, we may seek to resume coverage in the future. The stock is now assigned Not Rated (from UNDERPERFORM), with our last TP of RM1.20, based on 10x FY21 EPS (at its -1.0SD of 5-year forward historical mean).

Source: Kenanga Research - 30 Sept 2020