RHB ups Hai-O earnings forecasts, target price

RHB Research yesterday raised its fair value for HAI-O ENTERPRISE BHD [] to RM8.80 from RM6.80 after revising upwards its earnings forecasts to take into account the recent stronger-than-expected membership growth at the latter’s multi-level marketing (MLM) division.

“Since June 2009, Hai-O’s MLM division recruitment of new members has increased to an average of 4,000 to 5,000 a month (versus 3,000 to 4,000 in 1HCY09), representing an average increase of 29%,” RHB said in a note.

RHB, which has an outperform call on Hai-O, revised its FY2010-2012 forecasts for the company by between 4% and 26% after increasing projections for new members per month.

The increase in new members was mainly attributed to the success of Hai-O’s advertising activities such as celebrity endorsement and TV commercials for its water filter product (BioAura).

The research house also applied a higher price-earnings ratio (PER) multiple of nine times CY10 earnings (from eight times CY10 earnings previously), “to reflect increased investor participation in mid-cap stocks, lower risk premium and improved market sentiment”.

The PER multiple is still at a 38% discount to its target market capitalisation of 14.5 times PER for the consumer sector, to account for Hai-O’s smaller market capitalisation as well as lower liquidity, RHB added.

It also noted that sales from Hai-O’s recently launched health supplements and anti-aging skincare range have picked up despite initial mediocre sales performance.

“Nevertheless, Hai-O’s star product remains its water filter, which is still gaining popularity especially amongst the bumiputera community. While no figures were provided, management guided that average revenue/distributor continues to grow year-on-year. We forecast average revenue/distributor to increase by an unchanged 5%, 3% and 1% for FY2010-2012,” RHB said.

RHB has yet to input any contributions from Indonesia, where Hai-O had begun initial recruitment activities, having obtained a licence from the Association of MLM in Indonesia in August 2009.

“Recall that Hai-O only invested a total of US$480,000 (RM1.7 million) for its Indonesia venture, which is a minimal amount for the vast potential growth in the Indonesian market.

Management targets a conservative 5,000 to 10,000 new members in FY2010, and projects a minimum one year to break even,” RHB added.

Risks to RHB’s recommendation include the termination of supply agreements from its suppliers in China, stronger-than-expected strengthening of the greenback as well as weaker-than-expected increase in consumer spending.

Hai-O rose 12 sen to close at its intra-day high of RM7.20 yesterday on a volume of 121,400 shares.