This article first appeared in The Edge Financial Daily, on April 18, 2016.

KUALA LUMPUR: When consumer sentiment hit a new low and import costs spiked due to the weakening ringgit last year, many consumer counters took a hit. Even Amway (M) Holdings Bhd, the direct selling leader with a strong brand name and market presence, was no exception.

Amway’s revenue exceeded the RM1 billion mark to RM1.02 billion last year, but yet its net profit fell 35.97% to RM63.93 million, from RM99.85 million in the previous year, due mainly to higher import costs caused by the ringgit’s depreciation against the US dollar.

Weighted by the poor results, shares in Amway fell to a 52-week low of RM9.08 on Feb 12 — a 17.9% discount to its 52-week high of RM11.06 registered on May 18 last year.

This outlook has not changed much although the ringgit has started to gain momentum against the greenback. Last Friday, the counter closed at RM9.55.

Amid the weak consumer sentiment and high operating expenses environment, managing director Paul Yee — who was promoted to the post in February — is no doubt facing a tough task of improving the group’s profit (which was as high as RM109 million in 2013) and dividend yield (which used to hover around 5% to 6%).

In an interview with The Edge Financial Daily, Yee recognised that operating costs (including the cost of sales and marketing programmes) and foreign exchange (forex) rate changes, which has contributed to the slide in net profit over the last two years, will continue to put pressure on the group’s near-term profit.

“This year will continue to be a difficult year. Over the next few years, there may continue to be pressure on profits. It will take some time for us to be back to the normal scene, unless we pass all the costs or the effect of the weakening of the ringgit to the consumer.

“But we are recognising that this is investing in our future,” said Yee who expects the group’s profit to remain where it is now.

To support the business, the group’s capital expenditure this year is expected to increase. According to Yee, the group will be more aggressive in investing in marketing and sales programmes for Amway Business Owners (ABOs) in conjunction with the group’s 40th anniversary celebrations.

Besides, the group will also enhance technology and infrastructure (including upgrading its online platform and physical shops) in order to sustain the group’s best-ever recorded sales.

These strategies will also help the group to leverage more business in a more cost-effective manner, and in the meantime improving the group’s supply chain to save costs.

The group, which has 25 shops across Malaysia, also plans to launch 13 new products this year.

“With these focuses that we have put in place, we believe it will help us to maintain our performance,” said Yee, who served as the group’s general manager for more than 10 years.

Despite the recent rebound in the ringgit’s value against the US dollar, Yee said the group did not benefit as the translation rate was fixed by the group and its United States parent company in April last year.

Meanwhile, the recent products price hike will have a short-term impact on the group’s sales amid the soft market sentiment. But its long-term momentum remains intact, underpinned by strong ABOs.

“We anticipate we will see some correction [in sales] but based on what we experienced before, we are positive,” Yee added.

The group had in February and April increased the average selling price of its products by 9.3% — the first time since 2013. However, for Yee, the quantum of price hike has only offset the increase in product prices arising from other costs, and not the forex effect.

Last year, the ringgit depreciated against the US dollar by 20%. Year to date, the local currency has recovered about 9% against the US dollar.

“We are mindful [of increasing product prices] athough there is an impact on our profitability. But that’s the decision we made to ensure the long-term sustainability of our business,” Yee said.

He, however, dismissed concerns that the group’s sales record, which was supported by the pre-goods and services tax (GST) stocking-up activities last year, is unlikely to sustain amid the persistent weak consumer sentiment.

“When the GST was about to be implemented last year, we saw a higher-than-usual buy-up. We thought it was a one-time off (gain).

“However, we didn’t see a decline as we had anticipated when the GST was being implemented. Following strategies that we implemented, we saw a turnaround; the business picked up,” he said.

Nevertheless, the record sales failed to boost the counter. Instead,  the declining profit shed Amway’s attractiveness as a dividend stock. Although the group maintains its commitment to return not less than 80% of its net profit to shareholders, its dividend yield last year fell to 4.7%.

“Of course, compared with six or seven years ago, the dividend yield is not going to be the same. This is because we used to have systematically retained earnings that can pay back our shareholders, but now we have used up the retained earnings,” explained Yee.

He said the group’s quarterly dividend remained the same, but its special dividend varied in the last few years.

“However, we are here for the long term. We will strive to make sure the business continues to grow,” Yee added.

Meanwhile, TA Research analyst Ahmad Faris Abd Muis, who has a “sell” call on Amway, does not rule out the possibility of an upgrade for the stock.

In an email reply to The Edge Financial Daily, he said he expects fundamentals of retail to start to pick up in the second half of this year.

In the case of Amway, as consumers have adjusted their spending habits to suit the GST impact, it looks for restocking. High promotional activities and rewards could also attract new members. The prevailing job market uncertainty could also result in individuals looking for another income stream.

However, in terms of valuation, he opined that Amway, which is traded at 27 times its FY16 earnings per share, is still expensive when compared with its peers, especially considering that Amway’s dividend yield has fallen from its historical level of 5% to 6%.

He believes the biggest risk for Amway now is still the impact of forex as nearly 70% of its products are imported. Nevertheless, the local currency’s positive movement will benefit the group, he said.