We came away feeling positive after attending AMWAY?s FY16 analysts? briefing. As the Group has put in place strategy to drive sales, the higher costs as a result of aggressive marketing plans and incentive program was compensated with higher number of new core distributors force (CDF) and strengthened retention rate of the current CDF. Post-briefing, we upgrade FY17E and FY18E earnings assumptions with an increase of 7.0% to RM74.6m and RM77.7m, respectively. All in, we reiterate our MARKET PERFORM recommendation with higher TP of RM8.62 based on unchanged 19x PER FY17E, which is in line with -0.5 SD over the 5-year mean

Re-look on FY16. The main driver that propelled sales momentum in FY16 was from 40th anniversary sales and marketing programmes, price increase (average of 9.3%) carried out in two stages in Feb 2016 and April 2016 and positive growth in numbers of CDF. Management is maintaining a cautious stance not to increase prices drastically as it will affect the sales volume from the CDF, thus, for FY17, we foresee there will be no price increase for its products. In terms of marketing programmes, we believe higher costs incurred was compensated with higher number of new CDF and strengthened retention rate of the current CDF.

Innovation and incentive to drive sales. The Group launched its 40th anniversary sales in 2016, rewarding qualified distributors who hit sales target with a Mediterranean cruise trip. Subsequently, the Group launched 10 new products and 3 bundled solutions in the same year, to commemorate the event. Moving forward, we foresee more innovative product launches to boost its sales as well as stimulate the weak consumer sentiment, while continuously rewarding qualified distributors with incentives and trips to boost productivity. Thus, we think that the Group is in a good position to protect its sales numbers in FY17 with the strategies in place.

Continuous growth in Bumiputera Segment. Core distributor force surged by 5.0% to 251k distributors in FY16, with an improvement of average productivity by 1.4% to RM4,330 in the same period. Moving forward, the Group is planning to focus on attracting younger Bumiputera distributors by engaging 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 recruit more quality and driven distributors.

ABO positive momentum. We upgrade FY17E and FY18E earnings assumptions with an increase of 7.0% to RM74.6m and RM77.7m, respectively, on the back of higher numbers of core distributor force (CDF) as we were previously too pessimistic about its growth, especially in the Bumiputera Segment. Do note that the numbers of CDF are based on members that have been with the company for at least a year.

We maintain MARKET PERFORM recommendation with higher Target Price of RM8.62. We maintain our MARKET PERFORM recommendation with higher TP of RM8.62 (previous TP: RM8.04) based on unchanged 19x PER FY17E, which is in line with -0.5 SD over the 5- year mean. The sharp depreciation of MYR against USD may have raised concerns on the medium-term outlook of the company, but it could have been overplayed as we believe the company is able to pass on the additional costs if the forex turns unfavourable and the impact is too much to bear in view of its strong brand name and steady distributor base.

Source: Kenanga Research - 27 Feb 2017