Amway (Malaysia) Holdings Bhd
(Aug 21, RM7.30)
Downgrade to underperform with a lower target price (TP) of RM6.50: Amway net profit (NP) for the first half of financial year 2018 (1HFY18) of RM15.4 million (-36%) came in below our and consensus expectations at 29% and 27% of full-year estimates, respectively, due to the lower-than-expected sales, as ABOs (Amway business owners) were holding back purchases prior to the zero-rated goods and services tax (GST), which started on June 1, 2018, as well as the 6% sales discount to cushion the expected weakness in sales. A second interim dividend per share (DPS) of five sen was declared, bringing 1HFY18 DPS to 10 sen, which is within expectations.
Year-on-year, 1HFY18 NP plunged 36% dragged down by: (i) lower revenue (-5%) as consumers adopted a “wait-and-see” attitude prior to the 14th general election, (ii) lower gross profit margin by 1.6 percentage points (ppts) to 22.3% from 23.9% in 1H17 from the weaker ringgit against the US dollar, and (iii) higher effective tax rate of 38.3% because of certain expenses deemed not deductible for tax purposes.
Quarter-on-quarter, second-quarter (2QFY18) NP fell by 6% underpinned by: (i) lower sales (-3%) as ABOs were holding back purchases prior to the zero-rated GST, the 6% sales discount to cushion the expected weakness in sales, and (ii) higher effective tax rate of 49.9%.
Nevertheless, this was cushioned by the improved gross margin of 1.3ppts to 23%, which we believe was attributed to a better hedge rate with its principal at RM4 per US dollar as compared to above RM4.20/USD in 1QFY18/2HFY17.
We believe FY18 sales growth will be flattish as consumers are still adjusting to sudden changes in pricing of the products, despite the expected boost in sales for 3Q18 from the zero-rated tax holiday.
Furthermore, we understand that the new sales and services tax (SST) will also be charged on imported products, which is unfavourable to Amway which imports 90% of its products from its principal in the US.
Nevertheless, for the long-term focus, the group noted that they will continue to proactively focus on strategies to: (i) effectively manage operating costs to offset pressure on profitability, and (ii) implement various sales and marketing initiatives, as well as ABO experience-related infrastructure to support the ABO.
Downgrade to “underperform” from “market perform” with a lower TP of RM6.50 based on unchanged 19.5 times FY19E earnings per share, implying -2SD (standard deviation) of its five-year historical mean forward price-earnings ratio.
Risks to our call include: (i) higher-than-expected sales, and (ii) lower-than-expected operating costs. — Kenanga Research, Aug 21