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Hai-O Enterprise Bhd
(June 26, RM2.31)
Maintain sell with an unchanged target price of RM1.90:
Hai-O Enterprise’s fourth quarter of financial year 2015 (4QFY15) net profit recorded at RM9.4 million increased 28.5% quarter-on-quarter (q-o-q) while it declined 10.8% year-on-year (y-o-y). However, quarterly revenue managed to record a positive growth of 14.5% y-o-y and 13.7% q-o-q.

The firm’s 12 months of FY15 (12MFY15) net profit of RM30.1 million reached 110% and 104% of our forecast and market consensus respectively. The better-than-expected results were chiefly attributed to strong recovery of retail and wholesale divisions in 4QFY15 thanks to the pre-goods and services tax (GST) stock-up. Overall, the group recorded a 25.3% drop in FY15 net profit on the back of lower top-line, down 5.3%. The group’s multilevel marketing (MLM) division reported a profit before tax (PBT) of RM8.7 million in 4QFY15, increased by 4.4% y-o-y and 2.1% q-o-q. The overall contribution of  small-ticket items surged to over 60% of the total sales. The better performance was aided by attractive year-end sales campaigns to attract distributors, notably the new recruits.

However, the MLM division reported a PBT of RM28.2 million in 12MFY15, decreasing 6.2% y-o-y. The change in selling strategy by promoting more small-ticket items still failed to spur the division’s revenue. The higher sales recorded by small-ticket items were still unable to cushion a larger drop in the big-ticket items coupled with higher advertising and promotional costs.

Hai-O’s wholesale division posted a positive quarterly performance. The wholesale segment’s PBT expanded 156.6% for 4QFY15. The impressive performance was backed by higher inter-segment sales and the pre-GST promotion, which contributed higher revenue from the sales of a Chinese medicated tonic and patented medicine to its medical hall customers. However, for 12MFY15, the division posted a PBT of RM6.6 million, recording a decrease of 48.6% y-o-y. The sluggish performance was caused by lower inter-segment sales coupled with higher expenditure on corporate social responsibility activities and further dented by the weakening of the ringgit against the US dollar.

The group’s retail division registered better performance in 4QFY15 after recording a positive PBT number of RM2.1 million against a net loss of RM600,000 in the last quarter mainly due to Chinese New Year sales and followed by year-end Grand members’ sales campaign. Furthermore, consumers rushed to stock up before the GST came into effect on April 1, 2015. That lifted the full-year segmental PBT by 6.2% y-o-y amid stiff competition.

We maintain our FY16 net earnings forecast of RM 33.2 million, slightly higher by 1.02% y-o-y amid a challenging outlook for its wholesale division coupled with the stiff competition in the retail market. We foresee the MLM division may slightly improve with its small-ticket items strategy, which could boost sales in a longer term. In addition, the group will continue to introduce more new products and carry out an effective sales campaign to strengthen its MLM business. We foresee that consumer sentiment to stay fragile in the second half of calendar year 2015 as consumers are cautious about their spending mainly due to a higher cost of living after the implementation of the GST. Furthermore, the strengthening of the US dollar against the ringgit will increase the import cost of purchases. — JF Apex Securities, June 25

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This article first appeared in The Edge Financial Daily, on June 26, 2015.

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