Hai-O’s  9MFY14  results  were  below  our  and  street’s  estimates.  Its revenue  and core earnings contracted due to softer sales and weaker margins. Our FV is revised lower to MYR2.60 (from MYR2.70), as we trim our  FY14-15  numbers  on  the  back  of  weaker  margins.  Maintain NEUTRAL, as the stock lacks immediate re-rating catalysts.

• Below  expectations.  Hai-O’s  9MFY14  sales  and  core  net  profit (excluding a one-off MYR4.8m gain in  9MFY13  and a one-off MYR0.6m gain in 9MFY14 on its  property disposal)  weakened  by 1.2% and 10.4% y-o-y  respectively.  The  lower  turnover  was  due  to:  i)  a  7.9%  y-o-y revenue decline in the multi-level marketing (MLM) division, as the group changed  its strategy to focus on small-ticket items instead of big-ticket items, ii)  other division’s revenue contracted by 11%  y-o-y due to lower sales volume, offsetting the healthy sales growth from wholesale (+2.7% y-o-y) and retail (+4.6% y-o-y)  divisions. Core earnings were softer  due to:  i)  weaker EBIT from the wholesale division (-28% y-o-y)  on the back of  higher marketing costs and  the  weakening of MYR against USD, and ii)  lower EBIT from  the  retail segment (-18.3% y-o-y)  given  higher rental and personnel expenses. MLM’s EBIT improved only marginally by 0.4% y-o-y,  weighed  by  lower  sales  and  marketing  costs  incurred.  Vis -à-vis 3QFY13,  sales  increased  by  4.8%  y-o-y  in  3QFY14  while  net  profit moderated by 5% y-o-y due to lower margins in the current quarter.
• Lower margins.  9MFY14  EBIT and PBT  margins  dropped 2.1ppts  and 4.3ppts  y-o-y  respectively,  as  the  stronger  EBIT  margin  from  MLM (19.5%  vs  17.9%  y-o-y)  was  mitigated  by  thinner  margins  from  the wholesale  (11.1%  vs  15.8%  y-o-y),  retail  (5.6%  vs  7.2%  y-o-y)  and “others” (41.8% vs 68.9% y-o-y) divisions.
• Maintain NEUTRAL.  We trim  our FY14-15 earnings  forecasts  by 3-5% to factor in lower margins for the company’s products. Our FV is adjusted lower  to  MYR2.60  from  MYR2.70,  based  on  12x  CY14  EPS.  Maintain NEUTRAL, as the stock is currently trading at its historical P/E of 12x.  Its dividend yield remains decent at >4% at the current share price level.

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SWOT Analysis

Company Profile
Hai-O is involved in wholesaling, retailing and  multi-level marketing  of  complementary medicines,  medicated tonic, wellness, beauty and healthcare products as well as pharmaceuticals. The company also operates modern Chinese medicinal clinics.

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Source: RHB