• Amway’s 1HFY18 net profit of RM15.4m was below our and consensus estimates to make up only 27% and 28% respectively.

• Net profit for 2QFY18 fell 49.5% yoy due to lower sales and higher import costs. As a result, EBITDA margin dropped 3.5 ppts.

• Amway declared a second interim DPS of 5sen (vs 2QFY17: 5sen).

• We revised down our FY18F-20F forecast by c.40%. Maintain Sell with revised TP of RM6.50.

Impacted by lower sales and higher import costs

Amway’s 1HFY18 earnings of RM15.4m came in well below our estimates making up only 27%. The decline in earnings by 49.5% yoy was due to lower sales as well as higher import costs primarily attributed to the weak ringgit and higher product prices. Hence, EBITDA margin dropped 3.5 ppts yoy to 4.6%.

QoQ earnings dropped due to higher expenses

On qoq basis, both revenue and net profit decreased by 3.2% and 6.4% respectively. These were mainly due to lower sales coupled with higher operating expenses by Amway Business Owner (ABO) events for this current quarter. Additionally, although lower ABO bonus and sales incentive awarded to offset expenses, cost pressure was still present which resulted in EBITDA margin to drop 0.2ppts.

Dividend declared

A second single tier interim dividend of 5sen was declared, which is the same as 2Q17. We estimate a total of 30sen dividend per share to be paid for the whole year. This translates to a dividend yield of 4.1%.

Outlook clouded by uncertainties

Amway’s quarterly net profit has fallen significantly since 4Q17. Its business model is facing greater competition, compounded by higher product prices as the ringgit continued to remain weak (Amway’s products are imported in USD but sold in ringgit). We believe that weakening of the ringgit will continue to pressure Amway’s import costs added with costs of various incentives and marketing initiatives to support its ABO’s in facing stiff competition.

Maintain Sell with revised TP of RM6.00

We revised our FY18/19/20 earnings forecast, in view of the weak 2 quarters experienced by Amway this year and poor outlook. We believe the decline in Amway’s share price in recent days is a reflection of the expectation of conscious consumer spending. We maintain SELL with new target price at RM6.50 (from: RM7.40) based on DCF methodology rolled over to FY19 (WACC: 7%).

Source: BIMB Securities Research - 21 Aug 2018