Hai-O Enterprise Bhd
(Aug 9, RM4.34)
Maintain buy with a lower target price (TP) of RM5.39: After a recent meeting with management, we make adjustments to our distributorship growth forecast as we see a tapering off of that growth but foresee potentially higher revenue per distributor, which will likely be further spurred by the introduction of new fashion and lifestyle products. While we expect the slowdown seen in the fourth quarter ended April 2018 (4QFY18) to linger into 1QFY19, we believe sales will pick up in the subsequent quarters.
Despite recording a slower growth in the number of distributors in FY18, which was at 10,000 as compared with 57,000 in FY17 and 30,000 in FY16, we estimate that revenue per agent improved by 6% year-on-year (y-o-y) vis-à-vis declines of 6% and 8% in FY16 and FY17 respectively. We believe this indicates a more stable and higher quality distributor base. We are forecasting Hai-O’s multilevel marketing (MLM) distributor force to grow to 160,000 by the end of FY19, versus 150,000 as of end-FY18.
We also believe that the ramping-up of fashion product launches by Hai-O is timely given the fact that sales of such products are a relatively small proportion of total direct selling sales in Malaysia. This also ties in well with its distributor base, which is predominantly female and in the bumiputera community. This should spur higher sales and distributorship as new product launches provide new revenue generators to the existing distributor base.
To recap, Hai-O recorded weaker-than-expected 4QFY18 results due to a slowdown in MLM activities as members turned cautious prior to the 14th general election (GE14). We believe that the slowdown continued to linger in the few months post GE14, which coincides with 1QFY19 despite the extension of the deadline of the incentive trip to May 2018. Nonetheless, we foresee a pickup in the subsequent quarters.
After adjusting our distributor growth assumptions, we are revising down our earnings forecasts by around 15% to 2% for FY19 to FY21. Nonetheless, we are still seeing sustainable earnings growth for 2019 estimate(2019E) supported by new product launches and attractive incentive programmes. We believe that the recent share price weakness provides an opportunity for entry into this stock and thus retain our “buy” call with a revised TP of RM5.39 based on a lower 17 times calendar year 2019E price-earnings ratio (from 18 times previously). Key risks to our call include loss of distributors in the MLM division and weak take-up of new products. — Affin Hwang Capital Research, Aug 8