• Amway’s 1H17 net earnings of RM24.2m was in-line with ours and consensus estimates to make up 47% respectively.

• 1H17 YTD earnings caught up strongly to come in flat yoy, boosted by 2Q17 earnings rebound resulting from the lower operating expenses and effective tax rate.

• 2Q17 earnings increased by 56.3% qoq due to higher sales (+6.3%) and lower operating expenses.

• Upgrade to Hold with TP of RM6.95 based on DCF methodology (WACC: 7.5%)

Lower sales mitigated by lower operating expenses

Amway’s 1H17 revenue declined 14.9% YTD to RM489m due to high base effect in 1H16 resulting from i) strong buy up in 1H16 ahead of price hikes in Feb and Apr 2016, ii) AM40 National Convention Expo sales in April 2016 and iii) higher ABO momentum towards 40th Anniversary sales and marketing programmes. However, earnings came in flat as revenue decline was partially offset by lower provisions for sales incentives, lower operating expenses and lower effective tax rate.

YoY earnings improved on lower operating expenses

2Q17 earnings grew RM14.8m (+139%) due to lower provision for sales incentives and lower operating expenses. These partially offset the lower sales (-6.3% yoy) and higher import costs (primarily due to weaker ringgit and higher product cost)

QoQ improved on the back of improved sales

Earnings increased 56.3% qoq on the back of higher sales of RM252m (+6.3%) and lower operating expenses (-2.1 ppts).

Banking on reengineering to improve outlook

We believe outlook remains challenging due to softer domestic economy. As such, Amway has embarked on cost rationalisation and introducing more products to boost earnings. It also rolled out a mobile app for ABOs to reduce turnaround between orders and deliveries as well as enlarge ABO base.

Dividend declared

A second interim dividend of 5 sen was declared, lifting 1H17 dividend to 10sen (1H16: 10sen). We expect full year DPS of 280sen, translating into divided yield of 3.3%.

Upgrade to HOLD with TP of RM6.95

We upgrade to Hold with an unchanged DCF-derived TP of RM6.95 (WACC of 7.5%). We note that value is slowly emerging (after share price retracement) with dividend yields now over 4%. Nevertheless, we believe earnings outlook remains challenging.

Source: BIMB Securities Research - 24 Aug 2017