Hai-O growth underpinned by higher sales, says Affin Hwang

KUALA LUMPUR: Hai-O's Q1 FY2018 earnings were above expectations owing to stronger conribution from the multi-level marketing (MLM) segment, says Affin Hwang Capital Research.

The research firm maintains its Buy call on the stock with a higher target price of RM5.50 as it increases earnings by 11% to assume higher growth in MLM sales.

"Hai-O’s 1Q18 revenue and core net profit increased by 58.3% and 83% y-o-y to RM124.5mil and RM17.9mil respectively. 1Q18 EBIT margin increased by 2.4 ppts yoy to 18.3% as margins improved across all 3 segments (MLM: +1.2 ppts y-o-y to 18.4%, Wholesale: +9.8 ppts y-o-y to 22.7%, and Retail: +1ppts y-o-y to -6.5%). 

"Core net profit was ahead of expectations, accounting for 24% and 25% of our and consensus FY18E estimates. Traditionally 1Q is the weakest quarter contributing only to 15%-20% of full year earnings, but it came as a pleasant surprise that 40% y-o-y increase in the number of distributors in 1Q18 negated the seasonality effect," it said.

Hai-O's strong earnings growth is owing to its growing distributor force and higher sales per distributor. "Small ticket" items - F&B, personal care products and skincare - as well as "big ticket items" - fashion and garment - contributed to the higher sales.

The wholesale division, however, recorded a decrease in revenue of 8% y-o-y due to higher one-off export sales of RM2mil of Chinese liquor in Q1 2017. Profit before tax rose 60% from higher sales margin from patented medicines and Chinese medicated tonics. 

"We revise up Hai-O’s core net profit by 11% for FY18-20E, assuming higher distributors of 188,000 in FY18 (vs 159,000 previously). We are fairly positive that more of Hai-O’s product launches and contributions from fashion wear can sustain its sales momentum," said Affin Hwang Research.

It added that key risks include a loss of distributors in the MLM division, lack of new products to enhance growth and further weakness in the wholesale/retail division.
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