KUALA LUMPUR (Dec 19): Affin Hwang Investment Bank Bhd has maintained its “Sell” rating on Hai-O Enterprise Bhd with a lower target price of RM1.50 (previously RM1.60) in line with its earnings cut due to weaker consumption spending.

In a note today, the research house said that it cut Hai-O’s FY20-22E earnings by 5% to 15% in view of the more lacklustre outlook going forward.

It said the group’s 6MFY20 revenue declined 21.9% year-on-year (y-o-y) to RM134.5 million as Hai-O’s three main segments; multi-level marketing (MLM) (-30.2% y-o-y), wholesale (-2.4% y-o-y) and retail division (-3.6% y-o-y), recorded a decline.

“MLM, in particular, continued to suffer from overall weakness in consumption spending, while members’ recruitment and renewal were also affected,” it said.

Affin Hwang stated that Hai-O posted a net profit of RM15.1 million (-38.8%) for 6MFY20 which was below Affin Hwang’s and consensus expectations, accounting for 42% of respective forecasts.

It noted that the variance to its forecast was mainly due to lower-than-expected contributions across all segments.

The earnings before interest, tax, depreciation and amortisation (EBITDA) margin contracted 3.3 percentage points as a result of unfavourable sales mix coupled with higher import purchase cost.

Sequentially, top-line sales were marginally better at RM68.4 million (+3.5% q-o-q).

The research house said the MLM division saw a higher sales of big-ticket items (above RM500) whereas the wholesale segment saw better sales from Chinese medicated tonic and bird-nest products while the retail division sales received a boost from its half-yearly grand sales campaign during the quarter.

“Nevertheless, a lower margin due partly to an unfavourable sales mix and higher branding costs led to a profit decline q-o-q to RM7.3 million (-5.5%),” Affin Hwang said.

“While we expects some uptick in sales next quarter (riding on the Lunar New Year festive spending), especially from the Wholesale and Retail divisions, longer-term prospects remain challenging for the MLM business,” Affin Hwang added.

 At 9.34am, Hi-O was flat at RM2.15, valuing it at RM656.64 million.