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Thursday, December 22, 2016

Brokers Report: Hai-O Enterprise - MLM Continues to Shine



Maintain perform with higher target price (TP) of RM4.03






1H17 net profit of RM25.7m (+67% YoY) came above our expectation (62% of forecast). DPS of 5.0 sen was declared, as expected. Strong and sustained performance in MLM surprised us positively, which also reduced the risk of other operating divisions. Hence, FY17E-FY18E earnings forecasts are raised by 12%-13%. TP lifted to RM4.03 but MP call maintained as valuation is not compelling enough to warrant an upgrade.


Above expectation. 1H17 net profit of RM25.7m (+66.6% YoY) was above our expectation by matching 61.9% of our full-year forecast. Consensus comparison is not available as the stock is not widely tracked. The positive deviation can be attributed to the stronger- than-expected performance in MLM division. As expected, the Group declared DPS of 5.0 sen (vs. 1H16: 4.0 sen).


YoY, 1H17 revenue surged 38.4% to RM178.4m mainly driven by impressive growth in MLM division (+62.7%) thanks to the strengthening of distributor base to c.110k (+32.5%) from 83k in FY16 and strong sales of consumer products. 1H17 operating profit jumped 62.4% to RM32.8m again boosted by MLM division (+91.0%). The division contributed 78% of the 1H17 group operating profit (vs 66% in 1H16). As a result, 1H17 net profit grew 66.6% to RM25.7m.


QoQ, 2Q17 revenue climbed 26.8% to RM99.8m, supported by MLM division (+37.3%) thanks to the incentive trip promotion carried out during the quarter as well as the successful rebranding of its beverage product. 2Q17 operating profit surged 61.0% mainly driven by MLM division (+63.3%) on the back of strong revenue growth. As a result, 2Q17 net profit surged 63.3% to RM15.9m.


MLM continues to shine. We were positively surprised by the sustained growing momentum of the MLM division which was driven by both expansion in distributor base and the strong productivity on the back of the effective product strategy and rewarding incentive system. Besides, the increased contribution of MLM division has also reduced the risks of other operating divisions, including wholesale and retail divisions, which are exposed to the currency risk and weak consumer sentiment, respectively. Earnings growth momentum moving forward should be sustained, supported by MLM.


Earnings forecasts upgraded. We raise FY17E and FY18E net profits by 12.5% and 11.6%, respectively, after imputing higher growth assumption for its distributor base.


Maintain MARKET PERFORM with higher Target Price of RM4.03 (from RM3.60). Correspondingly with the earnings upgrade, our TP is raised to RM4.03, based on an unchanged 15.2x PER FY18E which implied +1 SD over the 5-year mean. While we are impressed with the strong growth achieved, the valuation is not compelling enough (last traded price at 14.2x PER FY18E, above +0.5 SD over 5-year mean) for us to upgrade the rating following the 61.8% YTD surge in share price as we believe the market may have already priced in most of the positives. As such, we are maintaining our neutral stance on the company on its strong brand names, sturdy balance sheet and generous dividend pay-out.



Source: Kenanga Research - 22 December 2016

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