Hai-O Enterprise Bhd
(April 8, RM2.50)
Maintain hold with an unchanged target price (TP) of RM2.50: We recently met up with Hai-O Enterprise Bhd’s management for an update on the company’s outlook.

 
Our key takeaways are: soft market conditions afflicting the multi-level marketing (MLM) segment; new products and promotions in response to the former; and, more resilient prospects for its retail and wholesale segments.

Subsequently, we hold onto our financial year 2019-2021E (estimate) (FY19-21E) earnings per share (EPS) estimates respectively while taking note of Hai-O’s dividend policy which would remain in place, offering attractive yields of 4.5%-5.6% at current levels.

To recap, Hai-O’s 9MFY19 results disappointed both our and consensus expectations, accounting for only 68% and 62% of our previous FY19E estimates respectively as the MLM’s segment’s sales performance (-35% year-on-year) remained lacklustre.

The management experienced challenges with membership attrition (falling from a peak of 160,000 distributors) following the company’s 25th anniversary grand sales promotion in 1HFY18, alongside persisting weakness in the market.

Other segments, including the wholesale and retail segments, performed better.  

 While a shift in the company’s strategy for the MLM segment reflects well on management’s planning in response to the change in underlying market conditions, we believe the company could be set for more volatile performances in 2019. Sequentially however, we expect a stronger 4QFY19 due to seasonally better performance for the MLM segment.

Although the management’s pivot could pay off in the long run, we foresee calendar year 2019 to remain challenging for Hai-O. Consequently, we maintain “hold” on Hai-O with a unchanged TP of RM2.50 based on an unchanged 13x FY20E EPS.  — Affin Hwang Capital, April 8