Result

• Within expectation. Hai-O’s 1QFY13 net profit meeting 27.3% of our full year estimates and 27.2% of consensus. The result was well within expectations.
• The net income stood at RM10.2mil, up 12.1% q-o-q and 33.4% y-o-y. However, the revenue was 11.9% lower q-o-q at RM61.15mil but increased 19.97% y-o-y.

Comment

• Robust y-o-y growth. The Group’s revenue and net earnings recorded at RM61.5mil and RM10.2mil, up 19.97% yoy and 33.4% yoy respectively mainly driven by higher sales in MLM division.
• Improving margin. Although the Group recorded lower qoq revenue (-11.9%), the net income inched up strongly (+12.1%) thanks to its better margin achieved (+3.6ppt) following the Group’s strategy in focusing its high margin products such as foundation garments.
• Strong MLM contribution. MLM division contributed the most revenue for 1QFY13, accounted 66% of total group’s topline. The growth was mainly due to the higher sales from its high-margin foundation garments and its key health food product. Although the revenue in MLM was declined 12% q-o-q, we believe the sales campaign and training program implemented by the Group will attract more members hence will further boost its MLM division for the next quarter.
• Weakening domestic consumption affected wholesale and retail divisions. Due to the softening economic backdrop, the performance for wholesale and retail division has been discouraging as consumers are more cautious on their spending. The revenue for both divisions dropped by 7% yoy for the former and 8% y-o-y for the latter. Furthermore, the lower earnings from retail division also aggravated by the higher operating cost as revenue generated from the 7 new outlets which opened last year have yet to contribute significantly to the Group.
• MLM division continues to shine whilst challenging outlook for retail and wholesale divisions. Going forward, we expect the Group will maintain its earnings momentum for upcoming quarters on the back of continuous effort to enhance its product mix, expand market channel as well actively recruiting new members for its MLM division. Meanwhile, we think that sales for wholesale and retail divisions continue to be under pressure.

Earnings Outlook/Revision

• We maintain our revenue and earnings forecast for FY13F-FY14F. We also introduce our FY15F earnings estimate.

Valuation & Recommendation

• Maintain BUY. We maintain BUY on Hai-O with unchanged target price RM2.34 pegging at 12.3x FY13PER, which is slighly above its average PE in view of its healthy earnings growth and strong recovery of MLM division.

Source: JF Apex Research - 20 Sep 2012