We attended AMWAY’s 2Q12 results briefing last Friday and came out feeling neutral on the company’s prospects, on the back of slowing demand and relatively higher spending on sales promotion and marketing given a more challenging market environment moving forward. Nevertheless, the management has reemphasized that AMWAY would not be affected by the strengthening USD in the short run as the company has just locked in the purchasing costs in June 2013, which will only expire in May 2014. We believe the impact would likely be felt later date in 2014. Due to limited distributable reserves, we are thus maintaining our payout ratio of 96% and 92% for FY13E-FY14E respectively, which are much lower than previous years’ pay-out ratio of more than 100%. However, these still work out to decent net dividend yields of 5.2% for both FY13E-FY14E. We are maintaining our net profit estimates of RM106.4m and RM111.3m for FY13E-FY14E for now (representing 7% YoY and 4% YoY growth respectively). Given the limited upside, we reiterate our MARKET PERFORM call on AMWAY with an unchanged TP of RM12.20 based on 18.0x PER on its FY14E EPS of 67.7 sen.

Strategy for the year. While the company did not disclose the growth number of its distribution force growth in 1H13, they emphasized that the growth was positive and healthy, which was driven by sponsoring programs and more than 100 rallies over the past few months. Meanwhile, it has introduced 5 new products namely 3 “ARTISTRY” and 2 “NUTRILITE” products. The management also highlighted the strategy for the remaining year which will focus on (i) the continuous effort to improve distributor force and productivity, (ii) introduction of new beauty and wellness products under the brand of “ARTISTRY” and “NUTRILITE”, (iii) utilization of technology and digital opportunity for greater accessibility to younger profile’s customers, and (iv) building a dynamic internal talent pool within the group.

Higher spending on one-off conversion. 1H13 PBT margin was down by 1.4ppt YoY to 15.8% partially due to the higher cost resulting from the conversion of the Sandakan’s Regional Distribution Centres (“RDCS”) into shops. This has brought the total number of shops to 21, and the remaining 5 RDCS will soon be converted in the future.

No threat from strengthening USD yet! While the company increased products prices across the board in two separate batches in Feb and April 2013 ahead of new procurement agreement, we understand that AMWAY has then locked in new product costs in June 2013, which will only expire in May 2014. Hence, the management does not foresee any material impact from the strengthening USD in the near term. Nevertheless, we do not rule out the possibility of further margin compression to kick in FY14 if USD continued to be strong next year. What to expect in 2H? The management foresees a low single-digit growth in 2H given higher spending on sales promotion and marketing and higher base effect due to a stronger 2H12.

No less than 80% payout! Although AMWAY has been paying more than 100% payout ratio in the past years, we believe they are unlikely to maintain more than 100% going forward given its limited distributive reserves. Thus, we are maintaining our FY13E-FY14E DPS of 62.5 sen for both years, which still translate into decent dividend yield of 5.2% for both years and payout ratio of 96% and 92% for FY13E-FY14E respectively.

Source: Kenanga