• Amway’s 1QFY18 net profit of RM7.97m was below our and consensus estimates to make up only 14% and 11.9% respectively.

• Net profit for 1QFY18 dropped 15.6% yoy due to lower sales and higher import costs. As a result, EBIT margin dropped 0.9 ppts.

• Amway declared a first interim DPS of 5sen (vs 1QFY17: 5sen).

• Maintain our FY18/19/20 forecast at this juncture. Downgrade to SELL with TP of RM7.40.

Impacted by lower sales and higher import costs

Amway’s 1QFY18 earnings of RM7.97m was below our estimates making up only 14%. The decline in earnings by 15.6% yoy was due to lower sales as well as higher import costs primarily attributed to the weak ringgit and higher product prices. Hence, EBIT margin dropped 0.9ppts yoy to 4.8%.

QoQ earnings dropped due to higher expenses

On qoq basis, both revenue and net profit decreased by 6.4% and 40.8% respectively. These were mainly due to lower sales coupled with higher Amway Business Owner (ABO) bonus for this current quarter. Additionally, although the ringgit has strengthened qoq, cost pressure was still present which resulted in EBIT margin to drop 2.4ppts.

Dividend declared

A first single tier interim dividend of 5sen was declared, which is the same as 1Q17. We estimate a total of 30sen dividend per share to be paid for the whole year. This translates to a dividend yield of 3.6%.

Outlook clouded by uncertainties

Post-general elections, consumer confidence may return due to an abolishment of taxes and re-introduction of subsidies. Nevertheless, uncertainties remain high as to whether this could be translated into greater consumer sentiment and purchasing power immediately, in our view. A strengthening of the ringgit has the advantage of reducing Amway’s import costs but we believe this benefit would be partly undermined by costs of various incentives and marketing initiatives to support its ABO’s in facing stiff competition.

Downgrade to Sell with TP of RM7.40

At this juncture, we maintain our FY18/19/20 earnings forecast. We believe the rise in Amway’s share price in recent days is unwarranted as expectation of a consumer spending boost is too premature. We downgrade to SELL with target price remain at RM7.40 (downside of 12%) based on DCF methodology by applying WACC of 7.5%.

Source: BIMB Securities Research - 17 May 2018