KUALA LUMPUR: Long known for achieving consistent growth in profits and for generous dividends, direct-selling companies have been hit by numerous negative headwinds over the past year. Macroeconomic factors such as slower economic growth as well as a weakening ringgit have had the effect of eroding the companies’ margins, while at the same time product sales are stagnating.

For the past two years, earnings growth has slowed down considerably, while stock prices of four public-listed players — Amway Holdings Bhd, Zhulian Corp Bhd, Hai-O Enterprise Bhd and CNI Holdings Bhd — have largely underperformed the broader market’s recovery this year.

However, some said that the negatives have largely been factored in, which could make the shares an attractive investment opportunity.

The now-lower downside risk, coupled with the companies’ commitment in maintaining their consistently high dividend yields, may appeal to defensive investors who are concerned about the currently volatile markets.

Industry players said there is still hope for a recovery. According to Amway (fundamental: 2.5; valuation: 1.5)’s corporate affairs manager Russell Tan, a major change in demographics is paving way for further growth in the direct-selling industry regionally.

“While companies’ core distributor force (CDF) growth has decreased, we are beginning to see younger people coming to the fore. Over the past five years, more than half of Amway’s new sign-ups are below the age of 35. Even in a worsening economic environment, direct selling is one of the cheapest and easiest ways for young people to start a business, and they will be key driver for earnings,” he says.

In the past, Tan said short-term downturns in the industry have allowed direct-selling companies to re-strategise and prepare for long-term incremental growth. Regardless of current market conditions, shareholders who are invested for the long term have been richly rewarded, he noted.

On the operational side, Tan said that greater economies of scale have helped Amway cope with the challenges in the market. “Additionally, our brand name is established, we are less exposed to higher import costs and we have the backing of institutional shareholders.”

Company representatives of various direct-selling companies, including Amway, confirmed with The Edge Financial Daily that they are not planning to raise prices for their products this year. While price adjustments are typically done roughly once every two years, its postponement was necessary in order to maintain sales performance as well as mitigate the impact of the weak consumer sentiment, a general manager of operations for a publicly-listed direct seller said.

“We have opted to absorb the goods and services tax (GST), as well as the additional costs from import purchases due to the weak ringgit. Even though margins will be hit, we are hoping that they will be offset by the revenue increase from the more affordable small and medium-ticket items.”

Hai-O (fundamental: 3.0; valuation: 1.8) chief financial officer Hew Von Kin explained that the proportion of revenue contribution by different item segments have changed considerably over the past several years. For the company, small-ticket items now make up roughly two thirds of revenue compared to several years ago when big-ticket items made up the majority of sales.

“We are now focusing more towards achieving recurring sales, which come from the small-ticket items. Additionally, there is always the option of expanding into untapped overseas markets. Whether it is a good time to expand depends on the opportunities at hand,” he said.

Aside from CNI (fundamental: 1.65; valuation: 1.80), the three other companies are in a net cash position and possess substantial funds, which could be used for expansion activities.

According to Bloomberg data, the companies’ historical dividend yields put the sector in the same league as blue-chip stocks, with yields ranging from 3.33% to almost 6%. By way of comparison, the benchmark Kuala Lumpur Composite Index currently carries a forecast full-year dividend yield of 3%.

While net assets have remained steady over the past three years, thanks to the large cash load and minimal borrowings, the share prices of the direct sellers have fallen by as much as 50% from their peaks over the same period.

Value investors may view the current share prices as a fairer reflection of the companies’ fundamentals following a series of sentiment-driven selldown and excess volatility in the trading of the shares previously.

There is also a historical precedent in which direct-selling companies tend to pay out higher dividends in times of an economic or market downturn. For example, between 2007 and 2011, three out of the four companies paid out the highest amount of net dividends per share in financial year 2009, which was at the tail end of the global financial crisis.

That said, in spite of their generous dividend payout policies, lower earnings would translate into a lower payout amount. To counter this, there is the option of utilising part of the cash hoard for interim or special dividends, or the companies can also distribute treasury shares to appease shareholders.

“We advise investors to look at the company’s stock as a long-term investment. Having said that, it is reasonable to adjust current expectations in view of the macroeconomic headwinds,” said Hai-O’s Hew.

This article first appeared in The Edge Financial Daily, on April 20, 2015.