We came back from AMWAY’s FY2014 result briefing feeling more cautious on its outlook moving forward. A strongerUSD exchange rate could translate into higher sourcing costfrom its mother company in USA, while cost pass throughwould be difficult considering the soft consumer sentimentand imminent implementation of GST in 1st April 2015. As forthe dividend, we see further downside risk following thelower payout ratio in FY2014 as compared to the previousyear. Maintain MARKET PERFORM with unchanged TargetPrice of RM11.42, based on 18x PER FY15E, which implies 3-year mean PER.

Earnings momentum halted. To recap, AMWAY reported netprofit of RM99.8m (-8.5%) on the back of revenue amounting toRM855.8m (+2.6%) in FY14. The result was within ourexpectation, but the earnings growth streak was stopped after 4years of consecutive growth as the Group struggled to passthrough the higher operating costs in light of the challengingbusiness environment dogged by weak consumer sentiment.Management guided that Core Distributors Force (CDF) declinedto 242k from 246k in FY13, but productivity inched up by 4.4% toRM3540 during the year.

Margin compression on stronger USD. Management indicatedthat the stronger USD exchange rate will translate into highersourcing costs for the Group. However, costs pass through wouldbe difficult considering the imminent implementation of Goodsand Services tax (GST) in 1st April 2015. Thus, we are forecastinga lower gross margin of 30% in FY15E-FY16E (vs 30.4% in FY14and 31.9% in FY13) to be in line with the management guidance.

Three more to go. Moving forward, the Group is planning toconvert the remaining three of its Regional Distribution Centre(RDC) in East Malaysia into Amway Shop, a concept that allowsdistributors to cut lead time for the products to be moved fromwarehouses while the distributors can also select requiredproducts from the shelves as the Amway shops operate in asimilar manner as retail stores. The conversion could cost up toRM700k per shop in terms of CAPEX, which was within ourCAPEX forecast of RM3m in FY15.

More conservative on dividends. A lower DPS of 55 sen wasdeclared in FY14 as compared to 62.5sen in FY13, translatinginto lower dividend payout ratio of 90.5% vs 94.2% whichmanagement attributed to the depletion of retained profitreserves. Thus, we opt to be more conservative by imputing lowerdividend payout ratio of 90% (from 95%), resulting in lower DPSforecasts of 57sen and 60.6sen in FY15E and FY16Erespectively (from 60.2sen and 63.9sen).

Maintain MARKET PERFORM with unchanged Target Priceof RM11.42, based on 18x PER FY15E, which implies 3-yearmean PER. Despite lower DPS estimate, the stock still offers adecent dividend yield of 5.2% based on the last closing price,which we think can provide support to the share price amidst thechallenging outlook ahead.

Source: Kenanga