• Amway’s 1Q17 net earnings of RM9.5m were below our’s (16.2%) and consensus (14.7%) estimates.

• Net earnings for 1Q17 dropped 48% as compared to 1Q16 mainly due lower sales and higher import costs.

• We revised our FY17/FY18/FY19 earnings downward to RM52.8 (-10%), RM57.2 (-10%), RM63.5 (-9%) respectively.

• Downgrade to sell with new target price of RM6.95 based on DCF methodology (WACC: 7.5%)

Impacted by lower sales and higher import costs

Amway’s 1Q17 revenue declined 22.5% yoy to RM237.2m due to a high base effect in 1Q16 which resulted from: i) strong buy up in 1Q16 ahead of price hikes in Feb and Apr 2016 and ii) higher sales from increased number of Amway Business Owners (ABOs) and sales incentives for its 40th anniversary programs. We also note that distribution costs spiked 14.5% yoy, constituting 5.3% of revenue from 3.6% (a 2ppts increase), reflecting the higher import costs. As a result, 1Q17 EBIT margin contracted 2.5ppts to 5% while net earnings declined 48% yoy to RM9.5m.

Lower qoq performance

Revenue dropped 5.5% qoq while operational costs increased amidst elevated imports costs. As a result, earnings declined 8.8% qoq. The decline would be higher if not for lower sales incentives provisions.

Outlook remain challenging

We expect Amway to face a challenging year with the soft domestic economy set to prevail on the back of high cost of living impacting weak consumer sentiment. Furthermore, competition is on the rise with rising online marketing campaigns from rival brands. We believe earnings would remain under pressure going forward on higher distribution and marketing expense as it aims to boost sales. We slashed FY17/FY18/FY19 earnings by 10%/10%/9% respectively to incorporate the weaker-than-expected sales and a much higher import costs.

Dividend declared

Amway declared a 1st single tier interim dividend of 5sen which is same as 1Q16. We estimate a total of 30sen dividend for the whole year. This translates to a dividend yield of 3.9%.

Downgrade to SELL with new TP of RM6.95

We downgrade the stock to SELL (from Hold) with a lower TP of RM6.95 (from RM8.06) which implies FY17F PE of 21.6x. Our DCF derived TP is based on WACC of 7.5% and long term growth rate of 1.5%

Source: BIMB Securities Research - 18 May 2017