• We remain cautious on Amway’s prospect as we anticipate subdued performance due to key challenges ahead.

• Revenue growth is expected at a marginal +1% (average between FY19F-FY21F) due to expected lower sales, as products see an average of 2% price hike beginning 2019.

• We expect revenue per Amway’s Business Owner (ABO) will only improve marginally due to stronger competition.

• Overall, we estimate that the increase in overall cost due to SST implementation will reduce EBITDA margin by 0.7%-1.0% and pressure net margin to below its long-term 5% threshold.

• We maintain our Hold recommendation with a revised TP of RM6.00 based on DCF.

Flat revenue and ABO’s growth

Malaysia’s consumer confidence begins to taper off since the implementation of SST in September last year. Hence, we expect Amway to be duly affected and estimate an average 1% increase in revenue for our forecast period of FY19F-FY21F. In fact, Amway’s sales volume is estimated to have slowed down since 2017 as its price increase strategy affected customers’ purchases, resulting in lower revenue.

Gradual cost increase

During the recent analysts’ briefing, management shared information on substantial SST pressure towards most of its products. The tax imposed on these products now ranges between 5%-10%, hence raising the overall cost to Amway, and eventually to its customers. In addition, further development to improve ABOs productivity, i.e. via digital transformation, will increase operation costs by 3% thus exerting pressure on EBITDA margin from 7.3% in FY18, to 6.3% in FY20F, based on our estimate.

Changes in pricing strategy and ABOs productivity

Amway’s management will undertake an investment in digital transformation to increase ABOs productivity – an immediate plan to raise revenue per ABOs. Furthermore, in order to mitigate rising costs, Amway will increase its products prices by an average 2% this year. We believe however, the hike will only help to stabilise rather than improve its profit, due to a more cautious consumer spending.

Maintain Hold with revised TP of RM6.00

We maintain our Hold recommendation with a lower DCF derived RM6.00 TP (as opposed to RM6.80 previously). We expect Amway’s net profit to decline at 6% CAGR over 2019-2021 driven by flat sales and higher overall costs.

Source: BIMB Securities Research - 25 Mar 2019