Hai-O Enterprise Bhd

ALTHOUGH weaker consumer spending and the falling ringgit will affect earnings, Hai-O (fundamental: 3/3; valuation: 1.2/3) should be able to maintain higher-than-market average yields on the back of its strong balance sheet. It is also trading at comparatively undemanding valuations. 

The company sells a wide range of Traditional Chinese Medicines (TCM) — it has exclusive rights to import over 200 Chinese medicated tonic, tea and precious herbs products from China — and healthcare products mainly via multi-level marketing as well as wholesale and retail. MLM accounted for roughly 60% of revenue in FYApril2014.

Outlook for the local MLM industry is expected to be challenging, in view of rising cost of living and weaker consumer sentiment, which will result in lower spending. Cost of imported products will also increase with the weaker ringgit. For 1HFY15, Hai-O’s revenue and net profit declined by 10.6% and 30.6% y-y to RM107.5 million and RM13.4 million, respectively.

Moving forward, Hai-O intends to launch more affordable “small ticket” items to boost sales, carry out more sales and promotion activities, and recruit new members to expand its market reach.

Positively, Hai-O has a solid balance sheet. It has marginal borrowings and net cash of RM104.3 million, or equivalent to about 53.5 sen per share. 

The company has a minimum 50% dividend payout policy. Annual dividends totalled 14 sen per share in FY13-FY14, giving a higher-than-market average yield of 5.9%. Additionally, Hai-O has been buying back its shares since 2003 – treasury shares now stand at about 3.5% of total shares issued.

The stock is trading at comparatively undemanding valuations — trailing P/E of 13.4 times and 1.88 times book value. By comparison, Amway and Zhulian are trading at historical P/E ratios of around 19-20 times. 

Hai-O’s net margin and ROE for FY14 were 15.9% and 16.3%, respectively.
 

This article first appeared in The Edge Financial Daily, on March 18, 2015.