We are initiating coverage on Hai-O Enterprise Bhd with an OUTPERFORM recommendation and a
Target Price (TP) of RM2.90. We like Hai-O for its 1) strong Multi-Level
Marketing (“MLM”) business growth that will see it making a substantial growth
in earnings, 2) decent net dividend yields of 3.3%-3.8% given its >50%
dividend payout policy, which should be sustainable as its earnings are still
in a high growth stage, 3) its potential bonus issue and share dividend and 4)
its stable consumer and retail segment, which will benefit from the rising
consumer sentiment and affluence and also supported by its strong and expanding
MLM division, which consists of more than a 80% Bumiputra distributor
force. Strong growth in MLM to lead to a
high substantial growth in earnings. We expect the MLM division’s EBIT to register
strong FY13-14E growth of 10.7%-12.2% to RM27.0m-RM30.3m on the back of a
12.5%-12.2% growth in the revenue. This will be driven by a membership growth
of 6.6%-6.9%. Since the MLM division contributes at least >50% of the
group’s earnings, we hence believe that the group’s rising earnings trend will
continue and expect it to post a sustainable net earnings growth of 17.0%-13.4%
for FY13-14E.
Decent net dividend
yields of 3.3%-3.8%. Hai-O has been constantly liquid with a net cash
position. Low capex and advertising costs are one of the main reasons for this
as the company requires low outlet expansions unlike other retail businesses.
In addition, Hai-O’s stockists bear the cost of opening of stockist stores,
hence saving the company from capex and maintenance costs. We believe the cash
pile from its operating activities will
continue to stay strong in FY13-14E at 33.4m-38.5m, leading to likely FY13-14E
NDPS of 8.09-9.34 sen.
Potential corporate
exercise. Based on its historical corporate exercise practice, the company
could likely issue a bonus and share dividend ahead. The company has been
stacking up its retained earnings, which is currently 25% more than its share
capital. Thus, we are expecting a 1-for-5 bonus issue as the company will still
have a 1:1 retained earnings ratio to its share capital after that. In
addition, the company has been buying back its own share and we believe a share
dividend is also likely. A new bonus issue should increase the trading
activities of the stock. For instance, after the announcement of a bonus issue
in Dec 2009, the share price went up 55% while the trading volume increased
about 2.0 times within a 3-month period.
Well-built
distributor force. In Malaysia, the Malay population make up about 55% of
the total population and it is also the highest growth segment compared to the
other ethnic groups. Hence, the Malay population contributes a lot to the total
private consumption growth in the country. Hai-O has leveraged on this factor
in its MLM sales force whereby the majority of its current distributors
consists of the Malay ethnic group (>80%), which should ensure a sustainable
earnings returns to the group going forward.
Initiating coverage
on Hai-O Enterprise Bhd with an OUTPERFORM rating and a fair value of RM2.90.
We have applied a 12.8x Fwd. PER (representing +1.0 standard deviation above
Hai-O’s 2-year average Fwd. PER) on our FY14E EPS of 22.64sen. The targeted
Fwd. PER of 12.8x is reasonable given Hai-O’s still strong growth rates in FY13E and FY14E. However, it is still
marginally below the industry’s average 1-Year Fwd. PER of 17.0x, which we
think is fair due to the volatility in the group’s earnings in recent financial
years. Our fair value implies a 16.5% upside to the current share price and
total return of 20.3%. Hence, we assign an OUTPERFORM rating on the stock.
Source: Kenanga
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