Hai-O Enterprise Bhd
March 21 (RM2.41)
Maintain hold with an unchanged target price (TP) of RM2.50: Hai-O Enterprise Bhd reported net earnings of RM9.8 million in the third quarter of financial year 2016 (3QFY16), which increased by 9.4% quarter-on-quarter (q-o-q) and 33.9% year-on-year (y-o-y). Similarly, revenue stood at RM80.5 million, which rose by 9.4% q-o-q and 29.9% y-o-y. As for the first nine months of FY16 (9MFY16), the group’s net earnings stood at RM25.3 million, up 22.5% y-o-y on the back of higher revenue, which was up 23.6% y-o-y at RM209.5 million.
The group’s 9MFY16 earnings were within our and consensus expectations, which accounted for 82% and 80% respectively, thanks to the stellar performance of its multilevel marketing (MLM) division, coupled with continued growth in its retail and wholesale divisions.Hai-O’s strategy for its MLM division to focus more on small- and medium-ticket items successfully rendered a positive impact on the group’s earnings. The MLM division posted higher top-line and bottom-line growth in 3QFY16 on yearly and quarterly bases. The impressive growth was aided by higher sales volumes for most of its products, coupled with a higher number of new member recruitments, especially younger entrepreneurs, thanks to its continuous aggressive member recruitment programme. Furthermore, the positive impact of the incentive trip and promotional campaign in 2QFY16 also spilled over to 3QFY16.
Similarly, in 9MFY16, the group’s MLM segment recorded double-digit growth in its top line and bottom line, compared with the preceding years. The encouraging result has been sustained since 1QFY16, as we believe higher sales of small-ticket items continued to support earnings growth in the MLM division. In addition, continuous efforts by the group, which came out with a slew of attractive marketing campaigns, also boosted the number of newly recruited members by over 50% compared with 9MFY15.
In 9MFY16, its wholesale division posted positive growth in its revenue and pre-tax profit. The better performance of the division was chiefly underpinned by higher revenue generated from Chinese medicated tonics and tea, as well as contributions from higher inter-segment sales to the MLM division. Similarly, its 3QFY16 top line and bottom line also recorded positive growth on a yearly basis due to the same reason.
However, in 3QFY16, the wholesale division posted a decline in its sales and profit before tax (PBT) on a quarterly basis, caused by higher operating expenses incurred in the quarter due to inflationary pressure, and dragged down by lower sales of patented medicine and duty-free goods.
In 9MFY16, Hai-O’s retail division managed to post positive growth in its top line and bottom line, mainly supported by an effective members’ sales promotional campaign carried out in 3QFY16, coupled with mild recovery in consumer sentiment towards retail products compared with last year.
In addition, the retail division’s 3QFY16 PBT managed to record a positive number on a yearly basis, in line with higher growth in its top line against a net loss of RM570,000 in 3QFY15, backed by pre-Chinese New Year (CNY) sales during the quarter compared with 4QFY15.
Furthermore, the group’s quality product offerings with affordable pricing also managed to encourage consumers to spend more during the CNY. Despite higher sales in 3QFY16, pre-tax profit was lower compared with the previous quarter, owing to higher advertising and promotion costs incurred in the CNY festive season on top of higher operating costs incurred in 3QFY16.
We made no change to our earnings forecast for FY16 to FY17F (forecast), as we envisage Hai-O’s 4QFY16 net earnings to normalise to match our full-year forecast net income of RM30 million. Our call on Hai-O is kept at “hold”, with an unchanged TP of RM2.50. We pegged our TP at 11 times forecast FY17 price-earnings ratio, based on earnings per share of 23 sen.
We reckon that Hai-O’s MLM division will continue to underpin the group’s bottom-line and top-line growth, as more than 60% of total revenue comes from the MLM division. The group will launch an incentive sales campaign in the next quarter to sustain its positive momentum, as well as introduce better quality products by enhancing its packaging and reformulating its star products for its customers. Furthermore, the aggressiveness of new member recruiting will further widen its consumer and distributor base. — JF Apex Securities, March 21
HAIO (7668) - Hai-O’s earnings on track
http://www.theedgemarkets.com/my/article/hai-o%E2%80%99s-earnings-track
