This article first appeared in The Edge Financial Daily on August 23, 2019

Amway (Malaysia) Holdings Bhd
(Aug 22, RM6.20)
Maintain market perform with an unchanged target price (TP) of RM5.90: Amway (Malaysia) Holdings Bhd’s first half of the financial year ending Dec 31, 2019 (1HFY19) net profit of RM29.1 million (+89% year-on-year [y-o-y]) came in within both our and consensus expectations, making up 51% of full-year estimates. A second interim dividend per share (DPS) of five sen (second quarter [2Q] of FY18: five sen) was declared for the quarter, bringing its 1HFY19 DPS to 10 sen (1HFY18: 10 sen) as expected.

Y-o-y, its 1HFY19 net profit surged 89%, boosted by: i) stronger sales (+3%) due to positive Amway Business Owner (ABO) sales momentum and marketing plans for performance year 2019 as well as product buy-up ahead of price increases effective mid-March 2019 and mid-April 2019 (2% on average for all product ranges); ii) a lower effective tax rate of 25% (1HFY18: 27.4%); and iii) expansion in its profit before tax (PBT) margin by 3.5 percentage points (ppts) to 8.1% from 4.6% for 1HFY18 from a lower import cost primarily attributed to a favourable foreign exchange (forex) impact believed to be due to a better hedge rate with its principal at RM4 to a US dollar from the third quarter of 2018 (3Q18). Amway typically negotiates with its principal in 2Q and the new forex rate will be effective for inventories bought in 3Q.

Quarter-on-quarter, its net profit rose 74% for 2QFY19 despite a softer revenue (-7%) mainly due to: i) expansion in its PBT margin by 4.8ppts to 10.6% from 5.8% in 1Q19 due to lower bonus and sales incentives in line with lower sales and ABO qualification tracking; as well as ii) a lower effective tax rate of 24.5% (1QFY19: 25.9%). The lower sales were affected by the timing of buy-up activities in 1QFY19 ahead of the pricing hikes in mid-March and April.

Given the prolonged weakness in the US dollar-to-ringgit exchange rate, we believe Amway was on the unfavourable side during the hedging rate negotiations taken place earlier in April and May.

Note that Amway uses the Bloomberg one-year forward rate as its hedge rate base, which we believe was at RM4.17 to a US dollar and will be effective for its 3Q inventories. Nevertheless, we are positive on the group’s long-term focus on: i) managing effectively its operating cost to offset pressure on profitability; and ii) implementing various sales and marketing initiatives as well as ABO experience-related infrastructure to support the ABO.

We maintain “market perform” with an unchanged TP of RM5.90 based on 16 times FY20 earnings per share estimate (-2 standard deviation of its five-year historical mean price-earnings ratio).

Risks to our call include: i) lower-than-expected sales; and ii) higher-than-expected operating cost. — Kenanga Research, Aug 22