Hai-O Enterprise Bhd
(June 27, RM4.80)
Maintain outperform with an unchanged target price (TP) of RM6: Hai-O Enterprise Bhd’s net profit of RM74.8 million (+26%) for the financial year ended April 30, 2018 (FY18) came in below our and consensus expectations at 89% and 87% of full-year estimates due to the lower-than-expected sales and higher-than-expected effective tax rate in the fourth quarter of FY18 (4QFY18).
Hai-O considered the 4QFY18 sales (+7%), which accounted for about 24% of FY18 revenue, as lower than expected as 4Q typically registers about 30% of full-year sales, mainly due to the cautious consumer spending prior to the 14th general election (GE14).
The group declared a final dividend per share (DPS) of 11 sen, bringing FY18 DPS to 20 sen (FY17: 16 sen), within expectation.
FY18 net profit surged 26% underpinned by higher revenue (+14%) driven by: i) the multilevel marketing (MLM) division (+14%) and wholesale division (+21%), attributable to higher sales volume from newly launched big-ticket items in its MLM fashion and beauty care range of products as well as higher wholesale sales from health tonic and Chinese tea; and ii) earnings before interest and tax (Ebit) jumping 26% with expanded Ebit margin by +2 percentage points (ppts) to 21.1% from 19.1% in FY17, boosted by the MLM division (+12%), which contributed 71% of the FY18 group Ebit, and supported by its wholesale division (+143%), where both benefited from the sales of high-margin products (namely Infinence brands and premium Chinese medicated tonic).
The 4QFY18 net profit declined by 16% mainly due to contraction in the Ebit margin by 3.2ppts to 20.6% from 23.8% in 3QFY18 due to lower inter-segment sales in the wholesale division (-62%) from slower bulk purchases on premium items, and a higher effective tax rate of 27.7% (3QFY18:23.2%).
Furthermore, Hai-O considered the 4QFY18 sales (+7%) as lower than expected, accounting for about 24% of FY18 revenue as fourth quarter typically registers about 30% of full-year sales. The weaker sales this 4Q was mainly due to the cautious consumer spending prior to GE14.
We expect the MLM earnings to gain further momentum with shoes and leather goods designed locally in consultation with Datuk Jimmy Choo set to boost high-margin product composition as well as being supported by Hai-O’s 26th-year anniversary grand sales promotion started January 2018 as well as higher contribution from the newly launched fashion and beauty care range of products under the “Infinence” brand.
Moving forward, the MLM division will continue to expand its lifestyle segment of which margins are better compared with food and beverage products. On the other hand, wholesale and retail segments are expected to maintain the high Ebit margin with the sales of high-margin in-house brands (namely premium Chinese medicated tonic).
We maintain our “outperform” call with an unchanged TP of RM6 based on 17 times earnings per share (EPS) for FY19 implying +1 standard deviation above the five-year forward historical mean. We believe our target price-earnings ratio of 17 times is justifiable considering Hai-O’s average 13% net profit growth per annum over the next two years.
We like Hai-O for its double-digit growth in distributor base (currently at about 160,000), net profit growth averaging at 18% per annum over the next two years boosted by double-digit margin, and strong earnings support from high-margin products under its MLM network and leading Chinese medicine retail shops (under its other business).
Risks to our call include lower-than-expected sales, and higher-than-expected operating expenses. — Kenanga Research, June 27