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Hai-O points to long-term dividend value
Oct 09, 2018
Source: Focus Malaysia
 
   
From left: Hew, chairman Tan Kai Hee and MD Tan Keng Kang speak to the press following Hai-O’s recent AGM. Established in 1975, Hai-O today offers a wide range of complementary medicines, medicated tonic, wellness, beauty and healthcare products and clinical services. The principal business of the group involves wholesale and retail, multi-level marketing, pharmaceutical manufacturing and Chinese medicinal clinics. It is headquarted in Klang.
 

Hai-O Enterprise Bhd’s recent weak results have been attributed to a range of reasons, which includes the Ramadan month, Hari Raya festive season and the 14th General Election. Despite the challenges and the likelihood that the environment will continue to remain difficult in the near future, the company hopes that shareholders will still see Hai-O as a worthwhile investment given its history of rewarding its shareholders well via dividends.

Hai-O chief financial officer Hew Yon Kin points to the company’s record of rewarding its shareholders handsomely as a reason to stay optimistic on the counter. The company is a distributor of herbal and medicinal products. It also distributes various other healthcare products via multi-level marketing (MLM), wholesale and retail.

“You see the overall market went down and (because) Hai-O is a consumer stock, we were not spared. (But) the important thing which I always emphasise is that we are a long-term investment. We have our dividend policy to reward our long-term loyal shareholders. In FY18, we will pay 80% (approved at the recent AGM) and the previous year we paid 70%. This translates into a high dividend yield of more than 4%,” Hew tells the media on the sidelines of Hai-O’s recent AGM.

A blip in results

Hai-O has a dividend payout policy of not less than 50% of the its profit after tax. In FY18, the company rewarded shareholders with a total dividend of 20 sen for the year, up from 16 sen in FY17. This translates into a payout of 80% (FY17: 70%) of the company’s profit after tax for the year.

The company’s share price has also tumbled to RM3.83 on Oct 1 from RM5.38 on May 21, disappointing some investors. Year-on-year (yoy), the company has seen its counter lose 25.5% of its value to RM3.79 from RM5.09. Year-to-date, it remains 31% lower.

From a financial perspective, the company had an overall strong financial year 2018 (FY18) as revenue rose 14.2% to RM461.7 mil from RM404.24 mil. This translated into a stronger bottomline of RM72.5 mil, up 22% from RM59.4 mil over the same period under review.

However, the fourth quarter was a blip as both revenue and net profit came in lower. The troubles carried into the first quarter of FY19 (1QFY19), with revenue slipping 35.6% to RM80.1 mil from RM124.5 mil in 1QFY18. This dragged down its bottomline by 40% yoy to RM10.7 mil from RM18 mil.

Selling pressure has slowed

A local research analyst tells FocusM he believes the fall in share price was driven by profit-taking when consumer sentiment was at a high. He adds that the selling pressure has slowed as the uncertainty over the Pakatan Harapan government’s policies has somewhat tempered sentiments.

Despite this, he is not optimistic that the share price can regain its lost ground in the near term. According to the analyst, it will be difficult for the counter to improve this year given the challenges the company will face from both local and external factors.

“If the earnings can be maintained, then the share price will become stable, (especially if you) factor in the dividend return (investors can gain), but I will say it will be hard (for a share price recovery in 2018),” he opines. “One boost to the share price might come if the multi-level marketing segment can grow fast enough, another might be to give more dividends.”

Nonetheless, he acknowledges that the company continues to reward shareholders with higher dividends (in FY18). The question, he says, is whether it can maintain the payout at this level.

The analyst generally sees Hai-O as a good company over a longer horizon but for now advocates that investors adopt a “keep in view” policy. He notes that potential catalysts could be government policies which may boost consumer spending in the upcoming Budget 2019.

“If you are interested in buying into Hai-O, it is a long-term investment as it is not stable in the short-term,” he adds.

Affin Hwang Research has also turned cautious following Hai-O’s latest quarterly results. It has downgraded its rating to hold from buy over earnings concerns, particularly in the MLM segment which posted a 45% yoy decline in operating profit for 1Q.

Tough year ahead

Hew expects FY19 to be a challenging year primarily due to uncertainties over new government policies and the escalating US-China trade war. This combined with the reintroduction of the sales and services tax (SST) which has dampened consumer sentiment, translating into weaker demand.

Another concern for Hai-O is the slow growth of its MLM membership. The company has about 140,000 agents and continues to add new numbers, though not at the rate it once did, admits Hew.

“We are trying to expand our membership and we have recruitment initiatives. However, government servants who make up a big portion of Hai-O’s members are now more cautious about their participation since the new government came into power as they are unsure if they can have a second job,” he says.

The slow expansion of Hai-O’s MLM distributor base is among Affin Hwang Research’s concerns. It also sees margin pressures moving forward in light of Hai-O’s increased marketing spending for its fashion segment under the Infinence brand.

“In view of the significant earnings miss and cloudy outlook in the MLM segment, we cut our distributor growth assumptions to a three-year compound annual growth rate (CAGR) of 4% over FY19 to FY21 (from 9% previously), resulting in a downward revision of 26-27% in FY19-21 earnings forecasts,” says its research report.

Research house JF Apex Securities meanwhile takes a differing view on Hai-O’s prospects. Despite cutting its earnings forecasts for FY19 and FY20, it retains its buy rating on the stock.

“We continue to favour Hai-O for its stable profit margin with effective cost rationalisation and strong brand name (recognition) among Malaysian households. (It has a) strong balance sheet with net cash and lower risks due to less exposure to foreign markets and foreign currency risks. (As well as) better margins as compared to its peers coupled with better growth prospects,” said JF Apex in a recent research note.

Management also remains cautiously optimistic. “We are hoping to do better than the last FY, despite all these uncertainties,” says Hew.

He says Hai-O’s strategy in FY19 is to focus on offering a wider range of products and to further digitise and improve its e-commerce platforms. The company is also targeting to improve its cost efficiencies.