This article first appeared in The Edge Financial Daily on November 17, 2017

Amway (Malaysia) Holdings Bhd
(Nov 16, RM7.11)
Maintain market perform with an unchanged target price of RM7.50: The net profit of RM39.2 million (less than 9% year-on-year[y-o-y]) for the nine months of financial year 2017 (9MFY17) came within expectations at 72% and 75% of our and consensus forecasts, respectively. A five-sen interim dividend per share (DPS) was declared, bringing the year-to-date DPS to 15 sen (9MFY16: 15 sen), which is within expectations.

The 9MFY17 y-o-y revenue declined by 12% to RM732.9 million, attributed to a strong sales base in 9MFY16 ahead of the price increases (in February and April 2016) and major promotion programmes.

Although, the 9MFY17 gross profit declined by 12% to RM180.2 million due to higher product import costs on the back of a weaker ringgit against the US dollar, the negative impact was netted off by higher product prices for the year (average of 9.3%) resulting in an improvement in gross profit margin at 24.6% (more than 0.2 percentage point [pp]).

Coupled with lower operating expenses by 13% arising from lower marketing provisions, and a lower effective tax rate of 25.6% (9M17:26.1%), 9MFY17 net profit decreased at a lower rate of 9% to RM39.2 million, with a slight improvement in net profit margin at 5.3% (more than 0.1 pp).

Quarter-on-quarter (q-o-q), third quarter (3Q) FY17 revenue decreased by 3% to RM243.7 million, due to insufficient sales and marketing programmes to motivate the Amway Business Owners (ABOs).

However, 3QFY17 gross profit improved by 5% to RM63.4 million due to lower product import costs as a result of a stronger ringgit against the US dollar. Even though operating expenses were higher by 8%, the negative impact was netted off by a lower effective tax rate at 23.1% (2QFY17: 25.8%), resulting in a flattish net profit growth to RM15 million, with a slight improvement in net profit margin at 6.1% (more than 0.2 pp).

With the conclusion of the ABO Performance Year 2016 and the 40th anniversary programmes, the sales momentum is expected to slow down for the year, mainly due to lack of incentives and marketing programmes, along with weak consumer sentiments and economic headwinds.

Nonetheless, the recent strengthening of the ringgit against the US dollar has improved gross margins as 80% of the group products costs are in US dollars.

Moving forward, the group will continue to proactively focus on strategies to: (i) effectively manage operating costs to offset pressure on profitability, (ii) implement various sales and marketing initiatives, and (iii) use Bloomberg US dollar/ringgit one-year forward forecasts as a base to negotiate the hedge rate with Amway Global (supplier). — Kenanga Research, Nov 16