We came away feeling neutral after attending AMWAY’s FY15 analysts’ briefing. As the Group has put in place strategy to drive sales, the bottom lines and profit margins are likely to be under pressure as a result of aggressive marketing plans, incentive program and the celebration of its 40th anniversary. Management also explained the reason behind AMWAY’s exclusion from the Shariah-compliant list and has taken the necessary step to return to the list. Post briefing, we maintain our MARKET PERFORM call on AMWAY with unchanged Target Price of RM9.16, based on 19x PER FY16E.

GST a surprise helping hand. To recap, FY15 revenue surged beyond the RM1b mark, a 19.2% improvement as compared to FY14. We deem the feat impressive, particularly amidst the persistent weak consumer sentiments throughout the year and the GST implementation. Management attributed the record sales to the pre-GST stocking-up activities which propelled their distributors closer to sales target while the post-GST impact was also milder than expected, probably due to the successful incentive programme and new product launching. Moving forward, the growth momentum is unlikely to be sustained, but we believe the Group can maintain its sales at the current level.

Aiming for younger generation. Core distributor force (CDF) declined marginally by 1.2% to 242k distributors in FY15, but the average productivity improved by 21.5% to RM4,300 in the same period. Moving forward, the Group is planning to focus on attracting younger Bumiputra distributors by engaging with them through meetings, rallies, seminars, workshops and shop fairs. In the events, the distributors are to be motivated by the Group’s business structure as well as the incentive and award scheme and hence paving the way for AMWAY to be able to recruit more quality and driven distributors.

Innovation and incentive to drive sales. The Group has launched its weight-management programme, namely ‘Body Key’ in Sept 2015 and received overwhelming response with the first month sales hitting 400% of the Group’s initial target. Moving forward, we foresee more innovative product launches to boost its sales as well as stimulate the weak consumer sentiments. Besides, AMWAY will celebrate its 40th anniversary in 2016, with the Group rewarding qualified distributors who hit sales target with a Mediterranean cruise trip. Thus, we think that the Group is in a good position to protect its sales numbers in FY16 with the strategies in place.

Potential return to the Shariah-compliant list. AMWAY was excluded from the Shariah-compliant list in the November 2015 review due to the lower-than-required threshold of cash in Islamic account. However, management indicated that the necessary actions were taken to meet the requirement and are hopeful to be back in the Shariah-compliant rank by the Nov 2016 review.

Maintain MARKET PERFORM recommendation with unchanged Target Price of RM9.16, based on 19x PER FY16E, which implies -1SD 3-year mean PER. The earnings dip in FY15 (-36.0%) was disappointing due to the higher incentive as a result of higher sales, but we view the incentive as a longer-term investment to fuel distributors’ motivation moving forward. We continue to like the Group for its strong brand name and well executed sales and marketing strategies while the dividend yield of c.5% should provide cushion to the share price.

Source: Kenanga Research - 24 Feb 2016