9M17 net profit of RM39.2m (-9% YoY) came in within expectations at 72%/75% of our/consensus forecasts. We made no changes to our earnings assumption as we expect slightly positive sales momentum from year-end marketing programmes. Thus, we keep our Target Price unchanged at RM7.50 based on an unchanged 19x FY18E EPS, which is in line with -1.0 SD of the 5-year mean. Reiterate MARKET PERFORM call.

9M17 within expectations. 9M17 net profit of RM39.2m (-9% YoY) came in within expectations at 72% and 75% of our and consensus forecasts, respectively. A 5.0 sen interim DPS was declared, bringing YTD DPS to 15.0 sen (9M16: 15.0 sen), which is within expectation.

YoY, 9M17 revenue declined by 12% to RM732.9m, attributed to a strong sales base in 9M16 ahead of the price increases (in February and April 2016) and major promotion programmes (40th Anniversary celebration). Although, 9M17 gross profit declined by 12% to RM180.2m due to higher product import costs on the back of a weaker MYR against USD (average USD/MYR for 9M17 was at RM 4.3466/USD compared to RM4.0845/USD for 9M16), the negative impact was netted off by a higher product prices for the year (average of 9.3%) resulting improvement in GP margin at 24.6% (+0.2 percentage point). Coupled with lower operating expenses by 13% arising from lower marketing provisions, and lower effective tax rate of 25.6% (9M17:26.1%), 9M17 net profit decreased at a lower rate of 9% to RM39.2m, with slight improvement in net profit margin at 5.3% (+0.1 percentage point).

QoQ, 3Q17 revenue decreased by 3% to RM243.7m, due to insufficient sales and marketing programmes to motivate the Amway Business Owners (ABOs). However, 3Q17 gross profit improved by 5% to RM63.4m due to lower product import costs as a result of stronger MYR against USD (average USD/MYR for 3Q17 was at RM 4.2637/USD compared to RM4.3312/USD for 2Q17). Even though, operating expenses was higher by 8%, the negative impact was netted off by a lower effective tax rate at 23.1% (2Q17: 25.8%), resulting in flattish net profit growth to RM15.0m, with slight improvement in net profit margin at 6.1% (+0.2 percentage point).

Insufficient sales and marketing programmes. With the conclusion of ABO’s Performance Year 2016 and 40th Anniversary programmes, sales momentum is expected to slow down for the year mainly due to lack of incentives and marketing programmes, along with weak consumer sentiment and economic headwinds. Nonetheless, the recent strengthening of the MYR against USD has improved gross margins as 80% of the group products costs are in USD (average USD/MYR for 3Q17 was at RM 4.2637/USD compared to RM4.3312/USD for 2Q17). Moving forward, the group will continue to proactively focus on strategies to: (i) effectively manage operating costs to offset pressure on profitability, (ii) implement various sales and marketing initiatives, and (iii) use Bloomberg USD/MYR forecasted 1-year forward as a base to negotiate the hedge rate with AMWAY Global (supplier). (Bloomberg 1-year forward forecast: USD/MYR of RM4.2700/USD).

Maintain MARKET PERFORM call with unchanged Target Price of RM7.50 based on an unchanged 19x FY18E EPS, which is in line with -1.0 SD of the 5-year mean due to strong competition in the MLM industry which could limit the distributor growth to single-digit. Risks to our call include (i) lower-than-expected sales, and (ii) unfavourable changes in forex.

Source: Kenanga Research - 16 Nov 2017