Target Price: MYR2.70
Strategy Shift To Take Time
Hai-O’s 1HFY14 results were below consensus and our estimates. Sales and net earnings softened due to weaker numbers across the board. The group declared a 4 sen interim dividend for the quarter. We cut our FV to MYR2.70 (from MYR3.28) as we lower our earnings forecasts on slowing sales. Downgrade to NEUTRAL (from Buy), as we expect flat performance going forward due to stiff competition.
Missing consensus and RHB estimates. Hai-O‟s 1HFY14 results were below consensus and our expectations as revenue and core earnings (excluding a one-off MYR4.8m gain in 1HFY13 and a one-off MYR0.6m gain in 1HFY14 on property disposal) fell 4.4% and 13.3% y-o-y respectively. Sales from the multi-level marketing (MLM) division slipped 9.8% y-o-y due to a change in marketing strategy as the company promoted “small ticket” items to reduce its over-dependence on „big ticket‟ items. Turnover at the retail and “others” divisions eased 5.4% and 15.4% y-o-y respectively given the stiff competition in the domestic market. Topline at the wholesale segment grew 7.5% y-o-y, mainly driven by higher sales in Chinese medicated tonic and Chinese tea products but core net profit softened due to weaker EBIT across the board, especially from retail (-46.6% y-o-y) and the “others” segments (-59.9% y-o-y). Compared with 2Q13, revenue was a marginal 0.5% higher while net earnings dipped 6.7% due to weaker performance across all segments.
Margins narrow. Gross profit and EBIT margins dipped 0.6ppt and 1.9ppts y-o-y respectively owing to thinner margins from the wholesale (14.7% vs 17.5% y-o-y), retail (5.3% vs 9.4% y-o-y) and “others” division (46.3% vs 97.6% y-o-y). We are positive on the group‟s strategy of shifting to sales of smaller ticket products given that MLM EBIT margin expanded 0.4% y-o-y. The group proposed a 4 sen interim dividend for the quarter, lower than the 6 sen interim dividend paid last year.
Downgrade to NEUTRAL. We are trimming our FY14 and FY15 earnings forecasts by 13-20% on account of slowing sales. We revise lower our FV to MYR2.70 (from MYR3.28), based on 12x CY14 EPS. Downgrade to NEUTRAL (from Buy) given that the stock is currently trading at its historical P/E of 12x. We expect earnings growth to ease amid a tougher operating environment. The decent yield could provide some support to the share price.
Publish date: 19/12/13