Hai-O Enterprise Bhd
(Dec 19, RM2.14)
Maintain hold with a lower target price of RM1.93: For Hai-O Enterprise Bhd’s first half ended Oct 31, 2019 (1HFY20), its net profit of RM15 million was below our and the consensus expectations, accounting for only 34.3%/35% of respective full-year estimates.

 
Profit before tax (PBT) slid 6.4% quarter-on-quarter (q-o-q) due to a lower wholesale PBT margin (-41.2% q-o-q) which offset a higher margin of its multilevel marketing (MLM) division (+4.1% q-o-q) following a disappointing sales mix, coupled with higher cost.

However, the group’s revenue increased 3.5% q-o-q, thanks to higher big-ticket item sales of the MLM division, stellar sales of Chinese medicated tonic and bird’s nest products under its wholesale division as well as sales promotional campaigns of its retail division.

Hai-O’s revenue tumbled 25.8% year-on-year (y-o-y) for the second quarter due to a high-base effect, coupled with lower consumer sentiment, which resulted in lower revenue from all of its segments (MLM: -32.6% y-o-y; wholesale: -11.7% y-o-y; and retail: -10.2% y-o-y).

PBT also depleted 47.7% y-o-y following higher import cost and an unfavourable change in its sales mix under the retail segment which led to its PBT margin dropping by 5.9 percentage points.

Cumulatively, Hai-O’s 1HFY20 revenue and PBT dropped 21.9% y-o-y and 39.6% y-o-y respectively due to lower contributions from the MLM, wholesale and retail segments on the back of slower consumer spending and higher cost.

The group has declared a single-tier interim dividend of three sen per share for FY20, representing 27.3% of our full-year FY20 dividend forecast.

We foresee that Hai-O’s operating outlook will be challenging in the immediate term and might be further bogged down by the MLM division on the back of lower new member recruitment, coupled with lower membership renewal.

We cut our earnings forecasts for FY20 and FY21 by 24% and 15.8% to RM33.2 million and RM41.5 million respectively after lowering our sales assumptions for the MLM division to better reflect lower new member recruitment and a lower PBT margin pursuant to higher marketing and branding expenses.

Risks include higher-than-expected operating expenses and lower-than-expected domestic spending due to higher cost of living. — JF Apex Securities Bhd, Dec 19