Hai-O’s FY14 results were within consensus and our forecasts. Sales and core net profit were weaker, due to lower sales across the board. A final single-tier dividend of 10 sen per share was proposed this quarter. We adjust our FV to MYR2.73 from MYR2.60, as we roll over our valuation to CY15. Maintain NEUTRAL.

FY14 numbers in line. Hai-O’s FY14 revenue and core earnings (excluding a MYR4.8m gain from the disposal of vacant land, and a one-off MYR1.5m cost relating to the company’s corporate social responsibility programs in FY13) dropped by 4.9% and 6.5% y-o-y respectively. The softer sales numbers were largely due to a 10.6% y-o-y revenue decline in the multi-level marketing (MLM) division, as the group revised its strategy to focus on small-ticket items instead of big-ticket ones. Turnover from its retail and “others” segments also moderated by 5.1% and 10.9% y-o-y, offsetting the slight revenue improvement in the wholesale division (+0.6% y-o-y). Core earnings were softer, no thanks to: i) weaker EBIT from the wholesale division (-33.9% y-o-y) due to the weakening of the MYR against the USD, and ii) poorer EBIT from the retail segment (-33.5% y-o-y) from higher operating expenses. Compared with 4QFY13, revenue and core earnings dropped by 14.9% and 5.3% y-o-y respectively due to weaker sales in the current quarter. ♦  Better margin for MLM. FY14 EBIT and PBT margins dropped 1.7 ppts and 3 ppts y-o-y respectively. The better EBIT margin from MLM (20.2% vs 17.8% y-o-y) was dragged down by the lower margins from the wholesale (9.3% vs 14.1% y-o-y), retail (5.8% vs 8.2% y-o-y) and “others” (38.9% vs 58.3% y-o-y) divisions. 
 
Key risks. Key investment risks are: i) a decline in consumer spending power, ii) intensifying competition, and iii) an inability to pass on higher costs to consumers

Maintain NEUTRAL. We leave our earnings estimates untouched, given the in-line results. Our FV is revised to MYR2.73 from MYR2.60 as we roll over our valuation to 12x CY15 EPS from CY14. Maintain NEUTRAL, as the stock is currently trading close to its historical P/E of 12x.

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

Hai-O is involved in wholesaling, retailing, multi-level marketing and pharmaceuticals. It also operates modern Chinese medicinal clinics.

Recommendation Chart

Source: RHB