We came away with an unchanged cautious view after attending AMWAY’s 1H17 Analysts’ Briefing. As the Group allocated lower marketing and incentives programmes provisions, the cost savings helped to cushion the negative impact from lower sales, high import costs and flattish growth in the number of new distributors force. Postbriefing, we made no changes to our earnings assumptions. As such, we keep our TP unchanged at RM7.50. Reiterate MARKET PERFORM call.

Re-look on 1H17. As the Group allocated lower marketing and incentives programmes provisions (operating expenses decreased by 20%), the cost savings helped to cushion the negative impact from lower sales, flattish growth in the number of new distributors force and higher import costs on the back of a weaker MYR against USD (average USD/MYR at RM 4.3592/USD in 1H17 compared to RM3.9641/USD as of 1H16). Coupled with the lower effective tax rate of 27% (1H16:30%), this resulted in flattish growth for 1H17 net profit, which registered at RM24.2m.

Below than average supplier exchange rates. As 80% of the group imports were directly impacted from the depreciation in MYR, the group conducted yearly negotiations with AMWAY Global (supplier) on exchange rates that resulted in the group buying at hedged rates lower than prevailing market rates. The negotiations in FY16 resulted in a hedged rate of 6% and 11%, below the average prevailing market rates in 2015(at RM3.9074/USD) and 2016(at RM4.1424/USD), respectively. Moving forwards, the group is using Bloomberg USD/MYR forecasted 1-year forward as a base to negotiate the hedge rate. (Bloomberg 1- year forecast: USD/MYR of RM4.2800/USD). We have factored in the forecasted exchange rate in our earnings assumptions with expected improvement in gross margins by c.1% for FY17E and FY18E.

Regain back the sales volume with marketing programmes and innovative products. Even though the sales is not expected to be at the same level as FY16, the group is continuously organizing achievement recognition events, leadership conference, recognition dinner, rallies, workshops, seminar and events. In 2Q17, sales was higher by 6% QoQ due to positive response in the latest marketing programmes known as Amway-Zing day, which successfully attracted more than 62k ABOs and prospects. On top of that, the group introduced new innovative products, which included 7 new products and 3 bundles solutions to attract demand (refer to overleaf).

Lacking of incentives and marketing programmes. With the conclusion of ABO’s Performance Year 2016 and 40th Anniversary programmes, the sales momentum is expected to slow down mainly due to lack of incentives and marketing programmes, along with weak consumer sentiment and economic headwinds. However, we expect the negative impacts will be cushioned by lower marketing provisions and gradual improvement in gross margins with a more favourable exchange rate. Moving forward, the group noted that the operating environment for the second half of the year remains challenging due to the softer economic landscape arising from weak sentiment among consumers, while foreign exchange impact continues to exert pressure on the margins. The group will continue to proactively focus on strategies to: (i) effectively manage operating costs, and (ii) implement various sales and marketing initiatives. We made no changes to our earnings assumption. As such, we keep our target price unchanged at RM7.50 based on 19x FY18E EPS, which is -0.5 SD below the 5-year mean. Reiterate MARKET PERFORM call.

Source: Kenanga Research - 25 Aug 2017