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Monday, March 26, 2018

Hai-O Enterprise Bhd - 9M18 Within Expectations

Author: kiasutrader | Publish date: Mon, 26 Mar 2018, 11:25 AM

9M18 net profit of RM58.6m (+42% YoY) came in within both our/consensus expectations at 70% of full-year forecasts. We expect 4Q18 to register higher sales with the start of the 26th year grand sales overseas trip promotion to Switzerland and Paris (Jan-May 2018) as well as maiden contribution from the highly anticipated shoes and leather goods. Maintain OUTPERFORM with unchanged TP of RM6.00.

9M18 within expectations. 9M18 net profit of RM58.6m (+42% YoY) came in within both of our/consensus expectations at 70% of full-year forecasts. The group declared interim DPS of 9.0 sen for 9M18 (9M17: 5.0sen), which is within our expectation as normally c.70% of dividends are paid out in 4Q. We expect 4Q18 to register higher sales with the start of the 26th year grand sales overseas trip promotion to Switzerland and Paris (Jan-May 2018) as well as maiden contribution from the highly anticipated shoes and leather goods designed with the consultation of Datuk Jimmy Choo.

YoY, 9M18 net profit surged 42% underpinned by: (i) higher revenue (+23%) driven by MLM division (+28%), and Wholesale division (+17%) 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 its health tonic and Chinese tea, (ii) EBIT jumping 38% with expanded EBIT margin by +2.3pp to 21.3% from 19.0% in 9M17, boosted by MLM division (+24%), which contributed 70% of the 9M18 group EBIT and supported by its Wholesale division (+168%) through sales of high-margin products (i.e. premium Chinese medicated tonic), and (iii) lower effective tax rate of 23.1% (9M17:24.9%).

QoQ, 3Q18 net profit declined by 10% mainly due to the lower revenue (-17%) from the earlier termination of the 25th year grand sales overseas trip promotion, which ended in the 2Q18 as well as a higher effective tax rate of 23.2% (2Q18:22.3%).

Outlook. We expect MLM earnings to gain further momentum with shoes and leather goods designed with the consultation of Datuk Jimmy Choo which are set to boost high-margin products composition as well as being supported by HAIO’s 26th year anniversary grand sales promotion in 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 to F&B products. On the other hand, wholesale and retail segments are expected to maintain its high EBIT margin with the sales of high margin in-house brands (i.e. premium Chinese medicated tonic).

Maintain OUTPERFORM with an unchanged target price of RM6.00 based on 17x FY19E EPS implying +1.0SD of its 5-year forward historical mean. We believe our target PER of 17x is justifiable considering HAIO’s average 32% net profit growth per annum over the next two years. We like HAIO for its; (i) double-digit growth in distributors base (currently at c.160k), (ii) net profit growth averaging 31% per annum over the next two years boosted by double-digit margin, and (iii) strong earnings support from high-margin products under its MLM and leading Chinese medicine retail shops (under other business).

Risks to our call include: (i) lower-than-expected sales, and (ii) higherthan-expected operating expenses.

Source: Kenanga Research - 26 Mar 2018

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