Thursday, June 14, 2012

Hai-O: Back In The Reckoning

Hai-O Enterprise Berhad
Price Target : 2.34
Last Price : 2.10
Initiating Coverage - Target Price: RM2.34

Investment Highlight

We initiate coverage on Hai-O with a BUY call recommendation and target price of RM2.34. We value Hai-O at 12.5x FY13PER, which is at its upcycle PE in view of its earnings regaining momentum and attractive dividend. We reckon the stock will be back on investors’ radar screen once it posts a more convincing earnings growth in future.

Well recovery of MLM division in 2QFY12. Since the new strict membership guideline for MLM has been implemented in early April 2010, the Group’s revenue and net earnings declined 56% and 59% respectively from FY10 to FY11. However, we started to witness the Group slowly regaining its earnings momentum in 2QFY12 with both topline and bottomline started to register qoq (revenue: +10.25%; net profit: +4.58%) and yoy (revenue: +6.80% and net profit: +26.69%) positive growth following dismal performance of last 8 consecutive quarters. Looking forward, we expect the revenue and net earnings growth in MLM division is sustainable on the back of the Group’s continuous effort in recruiting new members targeting 2000-3000 monthly, launching of new key product such as Bamboo Salt and concentrating of selling high margin household products.

Continuous healthy growth from retail division. The Group’s retail division recorded 19% growth in revenue and 10% growth in operating profit for FY11. The impressive growth was mainly due to aggressive promotion and sales of higher profit margin house brand products. The Group opened 3 new outlets in 2011, which make a total number of 70 outlets and targets to open 3-5 new outlets per annum. Furthermore, the Group also plans to upgrade and expand its pharmaceutical factory with offering new and innovative healthcare products.

Focusing on repeating consumer items to have better recurring income. Hai-O recently signed an agreement with KAEAM Food Corp of South Korea and now has been actively offering KAEAM Bamboo Salt, wherein the salt is one of Hai-O star products and the best selling repeating item. Furthermore, the Group is now more focusing on wellness, beauty and personal care products instead of big-ticket items as evidenced by the result improvement of MLM division for FY12.

Potential re-rating catalyst upon successful penetration of overseas market. The Group’s topline contribution from Indonesian MLM market is still making slow progress. The Group tweaked its strategy of capturing second or third tier cities such as Batam, Medan and Pekan Baru instead of Jakarta because of heightening competition. Besides, the Group also plans to export bird nest products to mainland China via its subsidiary, Yan Ou Holdings (M) Sdn Bhd. Should these ventures be successful, it would further strengthen its MLM and wholesale divisions.

Attractive dividend. Hai-O has a minimum dividend payout policy of not less than 50% of net profit. It has consistently committed for the dividend payment over the last 5 years. In FY11, the payout dividend was 52% equivalent to DPS of 27- sen/share or dividend yield of 3.37%. Assuming dividend payout of 50% for FY12-13, it will translate into DPS of 16.5 sen/share in FY12 and 18.70 sen/share in FY13, or equivalent to decent dividend yield of 3.96% and 4.49% respectively.

Source: JF Apex Research - 13 June 2012

Publish date: 13/06/12

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