Target Price: MYR3.28
Weaker MLM Numbers
Hai-O (HAIO)’s 1Q14 results were largely in line with our and consensus forecasts. We deem the numbers within expectations, as 2H is a traditionally stronger period for the company. Revenue and earnings were lower due to weaker sales from its MLM division. Maintain BUY, with our FV unchanged at MYR3.28.
• Lower sales from MLM. HAIO’s 1Q14 revenue and net profit declined by 9.7% and 14.6% y-o-y to MYR54.7m and MYR8.8m respectively.
The lower sales and earnings were mainly due to weaker revenue in the multi-level marketing (MLM) division and flat sales in its retail segment. MLM revenue dropped by 16.5% y-o-y, mainly attributed to the end of the special price promotion on foundation garments in the previous financial year. This was despite better sales from its newly-launched wellness products and other health food series, which had lower unit selling prices compared to foundation garments. Sales in the retail division dipped 0.1% y-o-y due to more cautious consumer spending.
Meanwhile, the wholesale unit’s sales expanded by 19.6% y-o-y on the back of higher demand for Chinese medicated tonics as well as an effective advertising and promotions programme. Similarly, earnings were weaker due to lower EBIT growth from MLM, which contracted by 28.4% y-o-y. HAIO’s retail segment recorded slight losses despite flat revenue, due to higher operating costs incurred by rental and personnel expenses. EBIT for its wholesale division grew by 26.3% y-o-y, thanks to higher margins derived from Chinese medicated tonics.
• Margins. GPM rose to 40.4% from 38.3% in 1Q13, but its EBIT margin moderated by 1.4% from higher administrative expenses.
• Maintain BUY. The MLM division is focusing on: i) launching new products, ii) rewarding its distributors via an incentive trip programme, and iii) reintroducing special price promotions on key items in order to beef up its performance. With these strategies in place, we believe the MLM division will continue to deliver satisfactory numbers moving forward. Maintain BUY, with the FV unchanged at MYR3.28, based on 12x CY14 EPS. HAIO’s dividend yield remains attractive at > 5%.
Publish date: 23/09/13