KUALA LUMPUR: Affin Hwang Capital Research is positive on Hai-O’s management quality and its ability to deliver growth going forward and reiterated its Buy call on the stock.
It had on Friday rolled forward its valuation to CY18E and raised its target price to RM4.92 from RM4.22, using the same price-to-earnings (PE) ratio of 18 times.
“ Key risks to our call: i) loss of distributors in the multi-level marketing (MLM) division; ii) lack of new exciting products to enhance growth; and iii) further weakness in the wholesale/retail division,” it said.
Affin Hwang Research pointed out Hai-O’s FY17 core net profit of RM59.3mil came within its and consensus expectations, driven by the MLM segment as membership continues to grow strongly.
“We believe the MLM segment still has more room to grow and reiterate our BUY call with a higher TP of RM 4.92 as we roll forward our valuation to CY18E.
Hai-O recorded an increase in 4Q17 revenue and core net profit of 34.3% on-year and 63.3% on-year to RM 118.4mil and RM 18.3mil, bringing FY17 revenue to RM404.0mil (+35.7% on-year) and core net profit to RM 59.3mil (+63.1% on-year).
“This was in line with our and consensus expectations, accounting for 101% and 103% of full-year estimates.
“FY17 earnings before interest and tax (EBIT) margin increased by 2.9 percentage points on-year to 19.1% due to the MLM segment (+2.0 percentage points on-year to 19.9%) and wholesale segment (+6.8 percentage points on-year to 17.3%) which mitigated the drop in the retail segment (-0.8 percentage points on-year to 3.4%).
The group’s FY17 results continue to be driven by its MLM division (76% of revenue) where turnover and profit before tax for MLM increased by 55% on-year and 71% on-year to RM308.7mil and RM62.6mil, respectively.
The research house attributed this to the group’s growing distributor force which is expanding at an average of 5,000 distributors a month and has reached over 100,000 distributors year-to-date.
We believe its “small ticket” items (personal & household, beverage and healthcare segments), coupled with the rebranding of their key beverage product “Min kaffe” and the launch of two new items in the beverage and skincare category during the financial year have contributed positively to earnings.
The wholesale division (13% of revenue) recorded a decrease in revenue of 3% on-year due to a drop in sales volume from domestic medical halls, but saw profit before tax rise strongly by more than 50% on-year to RM9.1mil due to higher margin sales from premium products.
The retail division posted flat revenue due to weak consumer sentiment but profit before tax decreased by 22% to RM1.4mil due to lower sales from house-brand products and higher staff costs.
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