Hai-O Enterprise Bhd
(Sept 29, RM1.67)
Maintain sell at RM1.66 with target price of RM1.27: Hai-O’s topline in the first quarter of FY04/12 declined by 6.9% year-on-year (y-o-y) to RM51 million.
The respective revenue growth of 6.1% y-o-y and 8.7% y-o-y in the retail and wholesale divisions was not enough to offset the 18.3% y-o-y revenue decline in the MLM division. Accounting for 57% of total revenue, the MLM division continued to be plagued by slow recruitment of new members and weak sales.
On the bright side, 1QFY04/12 earnings before interest and tax (Ebit) margin expanded by two percentage points to 21.7% (1QFY04/11: 19.7%), attributed to the increased contribution from the sale of higher margin products (including house brands); lower costs of imported goods due to the stronger ringgit and improvement in operational efficiency and productivity.
Consequently, 1QFY04/12 net profit fell by a smaller 0.9% y-o-y to RM7.7 million (1QFY04/11: RM7.8 million). Results were within both our and consensus expectations.
On a sequential basis, 1QFY04/12 net profit fell sharply by 9.5% on a 12.4% decline in revenue. This was partially attributed to a higher base effect as 4QFY04/11 captured aggressive year-end sales campaign in the MLM division, and sales campaign/year-end stock clearance in the retail division. Coupled with continuing low monthly membership additions, revenue from the MLM division fell by 15.8% quarter on quarter (q-o-q). Revenue from the wholesale and retail divisions fell by a sharper 24.7% q-o-q and 22.9% q-o-q respectively.
There are no changes to our FY12-14 net earnings forecasts. We remain negative on Hai-O due to slow recovery in the MLM division, which is unlikely to return to the level of robust revenue it reaped in 2009-2010 (more than RM100 million per quarter); a slow takeoff of its MLM operations in Indonesia, and lofty valuations considering its smallish market cap and slow growth outlook. — Affin IB Research, Sept 29