HAI-O ENTERPRISE BHD

Target Price: RM5.50 HAI-O’S first quarter of FY18’s revenue and core net profit increased by 58.3% and 83% year-on-year (yoy) to RM124.5mil and RM17.9mil respectively.

Commenting on this, Affin Hwang Capital Research (AHCR) said core net profit was ahead of expectations, accounting for 24% and 25% of its and consensus estimates.

“Traditionally the first quarter is the weakest quarter contributing only to 15%-20% of full year earnings, but it came as a pleasant surprise that 40% y-o-y increase in the number of distributors in the quarter negated the seasonality effect,” it said.

ACHR noted that Hai-O’s strong earnings growth continues to be underpinned by its growing distributor force, which is currently growing at an average of 5,000 distributors per month.

“Sales per distributor have also increased due to higher recurring sales of small ticket items (food and beverage, personal care products and skincare series).

“While big ticket items – fashion and garments (such as Hijabs) which were introduced early this year also contributed to higher sales,” ACHR said.

Meanwhile, wholesale division recorded a decrease in revenue of 8% yoy due to higher one-off export sales of RM2mil of Chinese liquor in the first quarter, but pretax profit rose strongly by 60% due to higher sales margin from patented medicines and Chinese medicated tonics.

ACHR maintained its “buy” call with a higher target price of RM5.50.

“We revise up Hai-O’s core net profit by 11% for FY18-20 estimated, assuming higher distributors of 188,000 in FY18 (vs 159,000 previously). We are fairly positive that more of Hai-O’s product launches and contributions from fashion wear can sustain its sales momentum,” it said.

It raised its target price to RM5.50 (from RM4.92 previously) based on an unchanged price to earnings ratio of 18 times on 2018 estimated EPS.

“We like Hai-O’s management quality and its ability to deliver growth going forward, and we reiterate our buy call on the stock,” it added.