HAI-O Enterprise Bhd’s operating outlook will be challenging in the immediate term and might be further bogged down by its multilevel marketing (MLM) division, said JF Apex Securities Bhd.
The traditional healthcare company’s revenue tumbled 25.8% yoy in the second quarter ended Oct 31, 2019 (2QFY20) due to high base effect coupled with lower consumer sentiment which resulted in lower revenue in all of its segments (MLM: -32.6% yoy; wholesale: -11.7% yoy and retail: -10.2% yoy).
On the same note, profit before tax (PBT) also dropped 47.7% yoy following higher import cost and unfavourable change in sales mix under the retail segment which led to the PBT margin dropping by 5.9 ppts.
“We foresee that Hai-O’s operating outlook will be challenging in the immediate term and might be further bogged down by MLM division on the back of lower new member recruitment coupled with lower member renewal as bogged down by disappointing consumer demand towards its core products (Chinese medicated tonics and other health and wellness products),” the research house said in a Dec 19 note.
The research house said: “Hai-O will continue to emphasise on several strategies for the MLM division to reinforce its distributor base and continue to reward its members with a variety of rewards and incentives.
“Besides, the company will also put in massive promotional campaigns for its wholesale and retail divisional products for the upcoming Chinese New Year festival.”
But JF Apex is maintaining its hold call with a lower target price of RM1.93 (previous target price: RM2.30) following its earnings forecast cut.
“Our revised target price is now based on P/E multiple of 17.5x FY20F EPS of 11 sen which is below its +1 standard deviation of three-year historical mean of 19.3x.
“We cut our earnings forecasts for FY20 and FY21 by 24% and 15.8% to RM33.2 mil and RM41.5 mil respectively, after lowering our sales assumptions for MLM division to better reflect its lower new member recruitment and lower PBT margin pursuant to higher marketing and branding expenses,” it said.
Hai-O shares opened 0.47% lower at RM2.13 before the midday break on Dec 19.
