Period  4Q14/FY14

Actual vs. Expectations  Within expectations. Net profit of RM99.8m (-8.5%) accounted for 98% of both our in-house and consensus forecasts.

Dividends  DPS of 25 sen was declared, bringing FY14 DPS to 55 sen (vs FY13: 62.5sen/share), below our expectation of 60 sen. The lower DPS was due to lower net profit as well as lower payout ratio at 90.5% against 94.2% in FY13.

Key Results Highlights  YoY, FY14 revenue inched up marginally by 2.6% to RM855.8m, driven by sales and marketing programs. However, net profit was down by 8.4% to RM99.9m, dragged down by higher operating costs (+4.8%) as well as higher effective tax rate of 25.8% as compared to 24.9% in FY13. To recap, transfer pricing experienced a hike of 3.5% beginning 1st June 2014, that the Group could not pass through on the back of persistent soft consumer sentiment.

 QoQ, 4Q revenue rose 4.9% to RM229.9m due to the higher productivity as a result of Nutrilite 80th Anniversary program on October 2014. However, higher tax expenses (+21%) lifted effective tax rate to 28.4% (3Q14: 23.3%) as certain expenses were unqualified for tax exemption, which brought net profit lower by 7.1% to RM23.2m.

Outlook  Further costs inflations are expected after the hike in transfer pricing back in June 2014 with the stronger USD against MYR set to translate into higher product sourcing costs for the Group and higher product prices for customers. However, as the Group locks in sourcing cost at a fixed rate on a yearly basis with the parent holding company, the forex volatility in the year will not cause fluctuation to products' prices.

 We are anticipating a challenging year ahead for AMWAY in view of the higher product sourcing costs and pricing as well as the potential impact by the implementation of GST. Sales growth of 2.6% in FY14 was lower than the average of 5.1% over the last 3 years while successive net profit growth momentum (3-year average of 11.7%) has also halted, suggesting that the saturation of the MLM industry may be accelerating.

 Nonetheless, we do not rule out a stronger 1Q15 as distributors might stock up big-ticket items ahead of GST, while sales might be further boosted by the CNY festival.

Change to Forecasts  Our FY15 earnings forecast was revised down by 5.6% after we imputed lower CDF growth rate and productivity rate; we also updated our USD/MYR assumption to RM3.53 to be in line with our economists’ forecast. We take this opportunity to introduce our FY16E earnings, with the net profit expected to grow by 6.2%.

 We keep our dividend payout ratio of 95% unchanged despite the lower payout in FY14 pending guidance from management in its analysts’ briefing tomorrow.

Rating Maintain MARKET PERFORM

 The stock offers 8.3% of total potential upside (2.9% capital gain, 5.4% dividend yield) from the last closing price, thus we maintain our rating)

Valuation  We keep our Target Price of RM11.42 unchanged despite the earnings cut. We ascribed a lower valuation of 3-year PER mean as compared to +0.5SD 3-year mean previously to reflect the more challenging outlook of the company but the multiples is higher at 18x (from 17x) after updating the latest EPS forecast and share price to PER bands.

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

Source: Kenanga