Hai-O Enterprise Bhd
(Dec 17, RM2.14)
Maintain “reduce” with a target price (TP) or RM1.80: Hai-O’s first half of financial year 2015 (1HFY15) results came in way below our and consensus expectations. This was mainly attributed to the weaker revenues from its multilevel marketing (MLM) and wholesale divisions. In view of this, we are slashing our FY15 to FY17 estimates further by 20% to 25%.

Hai-O’s 1HFY15 turnover and earnings declined by 10.6% and 30.7% year-on-year (y-o-y) to RM107.5 million and RM13.4 million respectively. This was mainly due to weaker revenue from its multilevel marketing (MLM) division and flat sales from both its retail and wholesale segment.MLM revenue dropped by 18% y-o-y to RM60.3 million which was mainly attributed to a significant drop in big-ticket items sales that had offset the better sales performance from its small-ticket items. As at 1HFY15, the “small and medium ticket” items contribute more than 65% of total revenue (from 48% in FY14).

While sales from its wholesale division remained flat, profit before tax fell 60.2% y-o-y to RM3.3 million mainly due to lower inter-segment sales to its MLM division as well as lower sales of its Chinese medicated tonics and teas.

Meanwhile, the group’s 1HFY15 earnings before interests and taxes margin softened 4.9 percentage points y-o-y to 16.8% due to increase in advertising and promotional expenses.

Given the disappointing set of results, we are cutting our FY15 to FY17 forecasts by 20% 25% to factor in the weaker-than-expected showing from its MLM division. We have also assumed higher operating and distribution expenses in view of growing inflationary pressures. Following the earnings downgrade, we are lowering our 12-month TP to RM1.80 (from RM2.31) based on an unchanged target multiple of 11.5 times, in line with its historical three-year mean price-earnings ratio on calendar year 2015 earnings per share.

We do not foresee a significant improvement in its retail division given the overall weaker consumer sentiment and we maintain our “reduce” recommendation. — Affin Hwang IB, Dec 17

This article first appeared in The Edge Financial Daily, on December 18, 2014.