Period  3Q14/9M14

Actual vs. Expectations AMWAY’s 9M net profit of RM76.6m (-4.3%) was slightly below expectations; accounting for only 69% and 70% of our in-house forecast and the consensus’ estimates, respectively, as 3Q is also traditionally a strong quarter for the Group. The negative deviation can be attributed to the lower-than-expected sales due to the persistently weak consumer sentiment.

Dividends  As expected, DPS of 10 sen was declared. We expect another 30 sen (interim + special dividend) to be dished out in 4Q, which will then make up our DPS forecast of 60 sen.

Key Results Highlights QoQ, reported revenue of RM219.1m was 13.2% higher. However, the healthy revenue growth did not translate into bottom line growth mainly due to the recognition timing of the operating expenses with the costs in previous quarters being under provided. As a result, the selling and administrative expenses rose sharply by 32% to RM22.6m vis-à-vis RM17.1m in 2Q14.

 YoY, 9M14 revenue was down marginally by 1.7% to RM625.9m, no thanks to the soft consumer sentiment in the market on the back of higher living costs environment. Meanwhile, 9M14 net profit declined by 4.3% to RM76.6m as gross margin fell 1.7pptx to 30.2%, probably due to the 3.5% increase in terms of transfer fees starting 1st June 2014, which the Group could not pass on to its customers in view of the poor consumer sentiment.

Outlook  Outlook was dented by the persistent weak consumer sentiment which was capping the productivity of its core distributor force. Meanwhile, the hike in transfer pricing is also expected to take a further toll on the profitability with the Group not prepared to increase its average selling price in FY14 with last price increase taking place in FY13. However, attributes such as dividend yield of 5.4% which is backed by its sturdy balance sheet as well as stable cash flows is expected to provide support to the share price.

Change to Forecasts We fine-tuned our earnings forecast by factoring in lower core distributor force growth and productivity due to the worse-than-expected consumer sentiment while also increasing the cost of good sales assumption as we had underestimated the impact of the transfer pricing hike initially. As a result, FY14E and FY15E net profits were adjusted downward by 8.2% and 8.8%, respectively.

Rating Maintain MARKET PERFORM

Valuation  Post earnings revision; we downgrade our Target Price to RM11.42 (from RM12.50) as we continue to peg our

TP to 17x PER FY15F, which implied +0.5SD over its 3- year mean PER. The stock still offers potential upside of 4.1% (-1.1% capital loss, 5.2% dividend yield), thus we maintain our call.

Risks to Our Call Better-than-expected consumer sentiment.

Source: Kenanga