3M16 net profit of RM18.0m (-51% YoY) met our (23%) expectation. DPS of 5.0 sen was below expectation due to the lower-thanexpected pay-out ratio, which prompted us to revise down our pay-out assumption. No change made to earnings forecast. Sales volume was unaffected by average 9.3% price increase, and we expect the sales incentives coupled with marketing and sales activities to drive sales moving forward. Reiterate Market Perform with higher Target Price of RM9.84 (from RM9.16).

Result within expectation. 3M16 net profit of RM18.0m (-51% YoY) was within our expectation by accounting to 23% of our forecast. Consensus comparison is not available as the stock is not widely tracked. First interim DPS of 5.0 sen was declared (1Q15:10.0 sen), which was below our expectation due to the lower-than-expected pay-out ratio. YoY, 3M16 revenue declined by 5.0% to RM305.9m as 3M15 was boosted by pre-GST front-loading prior to the implementation in April 2015. 3M16 gross profit of RM72.6m was 17.2% lower as compared to 3M15 due to the lower sales in comparison, as well as higher product costs due to the stronger USD. Meanwhile, higher incentive and operating expenses inflated selling and administration expenses by 35.3% and in turn dragged 3M16 PBT down by 50.3% to RM24.9m. As a result, 3M16 net profit dipped 51.0% to RM18.0m.

QoQ, 1Q16 revenue surged 14.0% to RM305.9m, driven by the strong momentum from the Group’s 40th Anniversary celebration as well as pre-price increase buying up by their distributors. The Group has increased the prices of its products by an average of 9.3%, which was carried out in two stages in Feb 2016 and April 2016. 1Q16 PBT surged 163.9% to RM24.9m due to low base effect as 4Q15 was dragged down by higher incentive and other operating expenses. Meanwhile, normalization of effective tax rate to 27.4% (from 46.1% in 4Q15) further catapulted the net profit growth to 255.5% and net profit to RM18.0m.

Steady despite challenging environment. Sales growth remained strong despite the weak consumer sentiment and economy headwinds which we believe was driven by the Group’s strong brand name and successful marketing initiatives. Meanwhile, we understand that the price increase has not deterred sales volume. Moving forward, we expect the Group to continue driving sales by encouraging its distributors with sales incentives as well as embarking on more marketing and sales activities and new product launches to counter the weak consumer sentiment.

Keeping forecasts unchanged. We made no changes to our FY16E-FY17E earnings forecasts. However, we assume a more conservative pay-out ratio of 85% (from 92%) following the lower-than-expected 1Q16 DPS. We now forecast DPS of 41.1 sen and 44.2 sen (from 48.2 sen and 52.1 sen) in FY16E and FY17E, respectively.

Reiterate Market Perform with higher Target Price of RM9.84 (from RM9.16). We roll over our valuation base year to FY17E and derive our new TP of RM9.84 based on unchanged 19x PER, which is close to its -1SD over 3- year mean. We are maintaining our neutral view on AMWAY, which is looking to sustain the growth momentum through the incentive programme and marketing activities in conjunction with its 40th Anniversary. However, high marketing expenses incurred for such activities might put pressure on its profit margin.

Source: Kenanga Reseach - 18 May 2016