Hai-O Enterprise Bhd By Kenanga Research
Rating: Underperform (maintained)
Target price: RM1.50
FURTHER pressure from stagnant distributors’ growth is expected, averaging at 140,000, a plunge from the highest level in FY18 at 160,000.
Another factor is the weakening ringgit against the yuan.
The group’s multi-level marketing (MLM) division, which saw a 30% decrease in revenue in 1H20 ended October, will develop more “small ticket” items with affordable prices to cater for market needs in view of the lower spending power of its members and to reinforce its ongoing digitalisation initiatives.
The wholesale division will focus on its core products, which include Chinese medicated tonic and other health and wellness products and will continue to widen its product portfolio.
The retail division will continue to develop more affordable house brand products to widen its product portfolio and will improve its sales incentive scheme.
Hai-O’s 1H20 net profit plunged 39% to RM15.1mil and was below expectations, believed to be due to higher-than-expected rebates on promotional items to attract distributors.
The first interim dividend per share of 3 sen was also below expectations.
Earnings before interest and tax contracted by 4.3 percentage points to 14.4% from 18.7% on the back of unfavourable merchandise mix skewed towards small ticket items as well as higher rebates on promotional items to attract distributors.
The MLM division’s dismal performance continued to persist in view of weak market sentiments with distributors continuing to cut back spending and slowed down marketing activities, which also affected members’ recruitment and renewal.
The aggressive promotion campaign by the retail division was uninspiring as buying momentum remained subdued, especially for premium health supplement products.
Higher bird nest exports by the wholesale division was also offset by weaker Chinese medicated tonic and patented medicine sales.