We attended AMWAY’s 1H15 analyst briefing and came away feeling comforted by the defensiveness and resilience of its business amid the weak consumer sentiment and GST implementation. We are positive on the 1H15 sales growth of 25.4% but the profit growth was dragged down by higher sourcing costs due to stronger USD and provisions for incentive programmes. Moving forward, the Group expects the incentive programmes in conjunction with its 40th anniversary to spur sales growth by motivating their distributors. All in, we reiterate our MARKET PERFORM call on AMWAY with unchanged Target Price of RM11.05, based on 18x PER FY16E.

1H15 boosted by pre-GST buying. To recap, AMWAY managed to record revenue growth of 25.4% to RM510.0m thanks to a strong 1Q15 driven by pre-GST front-loading activities. Besides, the launch of incentive programmes in conjunction with its 40th anniversary also played an important role in driving the sales. We think that the strong sales growth as of 1H15 was encouraging but we remain cautious in view of the persistently soft consumer sentiment. However, 1H15 net profit declined 8.8% to RM47.1m due to the higher product sourcing costs on the back of stronger USD as well as provision for the incentive programme due to the higher numbers of qualified distributors.

Soft sales not as bad as expected. On a sequential basis, 2Q15 revenue dipped by 41.6% due to the swing in purchasing due to the GST implementation and the high base effect from a strong 1Q15. Beside the pre-GST stock-up, 1Q15 sales were also boosted by product mix skewed towards durable and high-ticket goods. As for the 2Q15, management indicated that the soft numbers were not as bad as they initially expected with the product mix normalized and more consumable items being sold. We are comforted by the 2Q15 sales which only showed a mere 2.9% decline as compared to 2Q14 despite the GST dampener, mainly attributable to the Group strong brand image and effective sales and marketing strategy in driving the distributors’ efficiencies.

40th Anniversary to fuel motivation. In conjunction with AMWAY’s 40th anniversary celebration in 2016, the Group will reward qualified distributors who hit sales target with a Mediterranean cruise trip. We think that the attractive incentive can motivate its distributors and thus drive sales. On the flipside, the Group had to make provision for the incentive program due to the stronger USD as the expenses are denominated in USD while the numbers of qualified distributors have also grown more than the initial expectation. We made no changes to our earnings forecast as we have factored in the higher expenses in our 2Q15 RN report dated 20th August 2015.

Maintain MARKET PERFORM recommendation with unchanged Target Price of RM11.05, based on 18x PER FY16E, which implies -0.5SD 3- year mean PER. We like AMWAY for its strong brand image and well executed sales and marketing strategies. However, FY15E net profit is forecasted to decline by 4.9% while FY16E net profit growth is also pedestrian at 6.3%. Hence, we keep our neutral call unchanged. Dividend yield of c.5% should provide some support to the share price. 

Source: Kenanga Research - 21 Aug 2015