• Amway’s 9MFY18 net profit of RM32.6m was above our estimates to make up 96% whilst slightly ahead of consensus at 80%.

• Net profit for 3QFY18 increased 14.7% yoy due to higher sales, low import and depreciation costs. As a result, PBT margin increased 0.27 ppts.

• Amway declared a third interim DPS of 5sen (vs 3QFY17: 5sen).

• We revised up our FY18F-20F forecast by c.20%. Upgrade to Hold with revised TP of RM6.80.

Stronger 3Q18, but cumulative 9 months weaker yoy

Amway’s 3Q18 net profit rose on the back of +6.8% revenue yoy. No details were forthcoming, although we suspect this is mainly contributed by the 3-month tax holiday period until September. The quarter also saw a decline in cost, which could have resulted from a lower import cost as it could have drawn down previous inventories acquired at lower cost (due to a stronger ringgit in 1H18). However, for 9MFY18 net profit slumped 16.8%, compared to 9MFY17, due to weaker sales and higher cost overall. Its EBITDA and net profit margin also fell 1.33% and 0.85% respectively.

QoQ earnings increased due to lower expenses

On qoq basis, both revenue and net profit increased by 14.2% and 129.8% respectively due to higher sales coupled with lower operating expenses by Amway Business Owner (ABO) events for this current quarter. Additionally, although higher ABO bonus and sales incentives awarded were in line with higher sales, cost efficiency proves resilient for the quarter which resulted in EBITDA margin surging 3.64ppts.

Dividend declared

A third single tier interim dividend of 5sen was declared, which is the same as 3Q17. We estimate a total of 30sen dividend per share to be paid for the whole year. This translates to a dividend yield of 4.5%.

Moderate outlook

Amway’s 3Q18 net profit has increased significantly, the highest since 3Q16. However, its business model is facing greater competition thus Amway’s various incentives and marketing initiatives to support its ABO’s will add pressure on its operation costs. Despite our upgrade, we forecast Amway to experience lower net profit annually from FY18-FY20. Another key challenge is higher product prices imported in USD but sold in ringgit.

Upgrade Hold with revised TP of RM6.80

Amway’s share price has fallen by 12% since our Sell recommendation in August, We upgrade to HOLD with new target price at RM6.80 (from: RM6.50) based on DCF methodology rolled over to FY19.

Source: BIMB Securities Research - 15 Nov 2018