Friday, July 8, 2011

Is Hai-O Shares Buy-Back Sensible?

This is probably one of the most exciting company on The List judging by the fact I wrote on it many times. But this is not a good thing because I would rather prefer it to be booooorrring - business wise. I wasn't the only one. This once darling of many analysts now find itself no worthy to look at. Although I must admit I did caught by the numbers as well but I'll talk about it in details later.

If you look at Bursa announcement, you would have notice they have been actively buying back shares all the way back in late March this year. There could be 2 reasons behind this. One the price are undervalued so it makes sense to purchase. The second one is that the management is trying to hold their share price from falling further (given that consensus analyst valuation is at about RM1.80 - RM2.00). It is for the first reason, then current shareholders should have no much complain. If it is the second....that depends on where you stand. If you talk about charity that'll be fine. Business-wise....huh? Isn't the cheaper the better? Why maintain the price?

So if the management think it is undervalued, is their purchase price sensible. Lets put business analysis aside as I intend to write a shorter one today...erm..night. If current earnings is sustainable, we are looking about RM29.9mil after-tax owners' earnings assuming capex is about RM3mil (which I think will grow higher since they are getting into manufacturing the heat thingy). The business has lost its moat in MLM division and other division probably never have one. So for my own valuation, I am looking at about RM1.30 to RM1.50 judging by the risk of having no moat thus higher discount. That is roughly my purchase price back 08 anyway but have sold them off lah....though abit late. The management meanwhile repurchase the shares at the range of RM2.15 to RM2.30 which roughly 8% discount rate. So it is not too insensible still just that I am abit "cheap".

Now my mistake. Previous MLM earnings are mainly contributed by the big ticket items which is the water-filters and lingeries. These earnings are not sustainable. How often do you buy new water filters or health lingerie? Of course those filters inside have to change every year and some 2 years. But that only cost around 10% each of the entire water filter's price. If say an average of 3 filters have to be changed annually, that'll be only 30%. That if all the consumers willing to change them. Coincidently, this year revenue also 30% of last year in MLM division. BUT that is really just coincident because average MLM turnover is about 90%. That also tell us that it is still growing in some way. But I was really caught by the big numbers it is generating. If it was like what the analysts say that it had hit the bottom, it means current earning is sustainable. For me, I don't know I'll just have to wait for the next AR.

I had to take my hat off to Uncle Tan (not the MD by the way) who sold off ICAP stakes in HAIO before April 2010. I don't think that is luck...perhaps a lil..that's investing right.

Anyway, I still think the management does the right thing over the entire period. Even before it slows down. They had actually introduce lower priced  products which could generate recurrent sales earlier. So they know it and are putting efforts to do more including some halal chinese herbs. On the new act, I do hear some CDMs (it is a top seller position for those who are not into MLM) had their membership terminated. This will definitely hurt on the short term but it good for the long term and the whole industry. As for the retailing division, I think they high level strategy is right by concentrating on more house-own brand as well as promoting it. Retail business naturally don't have moat. But with their own brand they might create a small one (if it is successful). Technology division....we'll just wait and see.

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