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.
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.
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%.
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.
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
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