We attended Amway’s 2Q14 results briefing hosted by its management and came back feeling neutral on the outlook of the company while the management guidance also reaffirmed our forecast numbers. Looking forward, the Group will continue to focus on its core distributor force, which recorded growth of 0.8% YoY to 246k in FY2013. Meanwhile, product strategy would see more gravity on the beauty and wellness category. The Group is also aiming to improve market accessibility by converting its Regional Distributor Centre (RDC) into Amway shop and using digital channel for the introduction and presentation of its products. We maintain our TP of RM12.50, pegged to 17x FY2015 PER. The valuation implies 0.5x SD over its 3-year mean average, which is inline with the sector average.

RDC conversion plan in place. The conventional RDCs which are mini warehouses located in semi-industrial areas will be converted into Amway shops. The move would allow distributors to cut lead time for the products to be moved from warehouses while the distributors can also select required products from the shelves as the Amway shops operate in a similar manner as retail stores. However, more operating costs will be incurred as Amway shops operate on rented premises while previously RDCs were on the Group owned premises. Currently, the Group has 4 RDCs which will all be converted in FY14 to add up to the 21 Amway shops under its belt. We are positive on the move as the new model would provide more visibility of Amway brand. We did not make any changes to our earnings forecast as we were made aware of the RDC conversion plan earlier on.

No price increase in FY14. An increase of 3.5% in terms of transfer fees took effect starting 1st June 2014, thus translating into higher selling price of its core brand product, which we gather made up c.80% of its revenue. The management indicated it is not planning to increase the product selling price in FY14 after the Group last increased the selling price in early 2013 with the soft consumer sentiment and spending in mind. Meanwhile, the Group attributed the lower operating expenses in 1H14 to underprovision of costs as well as the costs recognition timing, thus indicating that the low operating expenses may not sustain into 2H14. This reaffirms our earning forecasts as we assume EBIT margin of 16.7% in FY14 against 17.1% recorded in 1H14.

Cautious on the industry. Looking forward, The Group expects flattish earnings growth in FY14 on the back of the soft consumer sentiment and stiffer competition. To recap, consumer confidence and sentiment remained soft during the year with the consumer confidence index declining for the fourth consecutive quarters as consumers are feeling the pinch of the subsidy rationalisation which resulted in rising costs of living as well as lower private consumption expenditure. We are keeping our earnings forecasts unchanged post-briefing as our EPS growth forecast of 2.1% YoY in FY14 is inline with the management guidance. Meanwhile, the Group suggested that it will continue to pay out not less than 80% of its net profit in FY14 as dividends to reward its shareholders. Thus, we are maintaining our dividend projection of 62.5 sen/share in FY14, representing a payout ratio of 92.3%. The dividend translates into dividend yield of 5.3% based on the latest closing price.

Reiterate MARKET PERFORM. We maintain our TP of RM12.50, pegged to 17x FY2015 PER. The valuation implies 0.5x SD over its 3-year mean average, which is inline with the sector average. Our neutral view on the company is warranted as the soft consumer sentiment is offset by decent dividend yield on the back of healthy balance sheet and stable cash flow, which should support the share price.

Source: Kenanga