Hai-O (HAIO)’s 1Q14 results were largely in line with our and consensus forecasts.  We  deem  the  numbers  within  expectations,  as  2H  is  a traditionally  stronger  period  for  the  company.  Revenue  and  earnings were  lower  due  to  weaker  sales  from  its  MLM  division.  Maintain  BUY, with our FV unchanged at MYR3.28.

- Lower sales  from  MLM.  HAIO’s 1Q14 revenue  and  net  profit  declined by 9.7% and 14.6% y-o-y to MYR54.7m and MYR8.8m respectively. The lower  sales  and  earnings  were  mainly  due  to  weaker  revenue  in  the multi-level marketing  (MLM)  division  and  flat  sales  in  its  retail  segment. MLM  revenue  dropped  by  16.5%  y-o-y,  mainly  attributed  to  the  end  of the  special  price  promotion  on  foundation  garments  in  the  previous financial  year.  This  was  despite  better  sales  from  its  newly-launched wellness  products  and  other  health  food  series,  which  had  lower  unit selling  prices  compared  to  foundation  garments.  Sales  in  the  retail division  dipped  0.1%  y-o-y  due  to  more  cautious  consumer  spending. Meanwhile, the wholesale unit’s sales expanded by  19.6% y-o-y  on  the back  of  higher  demand  for  Chinese  medicated  tonics  as  well  as  an effective  advertising  and  promotions  programme.  Similarly,  earnings were  weaker due to lower EBIT growth from  MLM,  which contracted by 28.4%  y-o-y. HAIO’s retail  segment  recorded  slight  losses  despite  flat revenue, due to higher operating costs incurred by rental and personnel expenses. EBIT for its wholesale division grew by 26.3% y-o-y, thanks to higher margins derived from Chinese medicated tonics.

- Margins. GPM rose to 40.4% from 38.3% in 1Q13, but its EBIT margin moderated by 1.4% from higher administrative expenses.

- Maintain  BUY.  The  MLM  division  is  focusing  on:  i)  launching  new products,  ii)  rewarding  its  distributors  via  an  incentive  trip  programme, and  iii)  reintroducing  special  price  promotions  on  key  items  in  order  to beef  up  its  performance. With  these  strategies  in  place,  we  believe  the MLM  division  will  continue  to  deliver  satisfactory  numbers  moving forward.    Maintain  BUY,  with  the  FV  unchanged  at  MYR3.28,  based  on 12x CY14 EPS. HAIO’s dividend yield remains attractive at >5%.

Source: RHB