Stock Name: AMWAY
Company Name: AMWAY (M) HOLDINGS BHD
Research House: OSK

Amway (Malaysia) Holdings Bhd
(Aug 10, RM8.00)
Maintain buy at RM8.12 with target price of RM10.83: Amway's 1HFY10 results grew 8.4%, while earnings increased by 7.8% year-on-year (y-o-y) mainly due to strong 2Q revenue (+9.8% y-o-y) and net profit growth (+33.5% y-o-y). The better results were mainly attributed to new product launches and well-received product promotions, as well as the more favourable ringgit to US dollar exchange rate. While we understand that the higher revenue was mainly driven by the higher number of members, management said the productivity of its members improved after the company implemented a new strategy in March 2010 to boost distributor productivity.

Despite the higher distribution expenses as a result of the full impact from its five shops (in Seremban, Kuala Terengganu, Kota Bharu, Batu Pahat and Bintulu) opened since 2Q2009, 1H earnings before interest and tax (Ebit) margin was flat y-o-y, given the wide Ebit margin in 2Q of 17.8%, against the weaker 12.7% in 1QFY10. While we see the ringgit weakening slightly against the US dollar towards the year-end, and Amway having accepted a price transfer from the US at an average 2% in May 2010 versus the 8% price hike approved in 2009, we believe these would have negligible impact on Amway's margins given (i) the improving consumer spending, (ii) the group's partial hedge of its currency risks and (iii) its inventory, which usually lasts 11 to 12 weeks, will help to buffer the impact of higher cost.

Given the positive feedback and performance of its retail shops, Amway plans to convert its regional distribution centres in Brunei and Melaka to retail shops. The group has opened eight shops in the past two years and has earmarked three shops for 2010.

Amway sees no reason to cut its dividend payout due to its small capex commitment (about RM15 million in 2010 for the renovation of its new office and the opening of new shops) and huge cash pile.

Hence, we are maintaining our dividend payout ratio of 100%. It is worth mentioning that Amway renewed its direct selling licence recently, becoming the first MLM company to be awarded a 10-year licence. We maintain our FY10/11 earnings forecast and target price of RM10.83, which is based on a discount dividend model valuation. ' OSK Investment Research, Aug 10


This article appeared in The Edge Financial Daily, August 11, 2010.