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Friday, March 23, 2018

Hai-O Enterprise Bhd - Higher Earnings Momentum Envisaged

Author: kiasutrader | Publish date: Fri, 23 Mar 2018, 09:18 AM

We came away feeling optimistic on HAIO’s prospect after a company visit. We expect MLM division to gain momentum on shoes and leather goods designed by Jimmy Choo which are set to boost high-margin products composition and HAIO’s overall profitability. We keep our FY18E/FY19E NP unchanged pending full pricing details, but, we raised our TP from RM5.60 to RM6.00 based on higher 17x FY19E EPS (+1.0 SD above 5- year forward historical mean) to reflect the potential boost in earnings. Upgrade from MARKET PERFORM to OUTPERFORM.

Shoes and leather goods designed by Jimmy Choo to boost MLM highmargin products composition. HAIO has recently launched high-margin products designed by Prof. Datuk Dr Choo Yeang Keat (popularly known as “Jimmy Choo”) for its lines of “Infinence” products under foot wear/insole and leather goods. Note that, Jimmy Choo is the “Infinence” brand’s fashion consultant, and will be involved in the design of shoes, bags, attires and accessories (he recently retired as non-independent and non-executive director and afterwards, taken position as HAIO consultant). All in, these highmargin products are set to contribute more than 10% of the MLM revenue for the 2H18 (from <5% in 1H18) and are set to boost its MLM margin further (currently MLM EBIT margin at c.20%). With its strong 160,000 distributors (as of October 2017) and over 90% of its distributors are women, we reckon that HAIO should see stronger sales momentum and better profitability driven by these high-margin women products under its stable. As for the incentives campaign, the group start the year 2018 with a Europe tour trip to Switzerland and Paris (Jan-May 2018) and subsequently will launch two Asian tours for the remainder of the year (allocated capex of RM10m/year). For this year, the group is targeting more than 1,000 qualifiers for each tour (from previous high of c.800 qualifiers), which we estimated at c.RM185m in sales value per promotion period.

Better prospects for its wholesale and retail segments. Although both divisions (c.20% of revenue) are vulnerable to currency risk, HAIO’s focus on high margin in-house brands (c.40% for retail sales) has proven to bear fruits which produced higher-than-expected EBIT in its 1H18 results (>100% growth rate to RM9.6m and registered 33% EBIT margin) and the group expect the momentum to continue with the support of 140,000 card members in its retail segment. HAIO has added one more exclusive dealership under its retail segment recently and coupled with its existing Traditional Chinese Medicines (TCMs) line-ups, this is expected to boost earnings much further ahead and suppress any weakness in forex. (Please refer to the following page for the segments overview).

Outlook. We expect MLM earnings to gain further momentum with shoes and leather goods designed by Jimmy Choo which are set to boost highmargin products composition and 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 in-house brands while mitigating forex weakness.

Upgrade to OUTPERFORM with a higher target price of RM6.00 based on 17x FY19E EPS implying +1.0SD above 5-year forward historical mean (previously from TP of RM5.60 based on 16x FY19E EPS, which was the +1.0SD-level back then). 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 at 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 its leading Chinese medicine retail shops (under its other business). Risks to our call include: (i) lower-thanexpected sales, and (ii) higher-than-expected operating expenses.

Source: Kenanga Research - 23 Mar 2018

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