FY17 NP of RM52.6m (-4% YoY) came in within both our/consensus expectations at 96% of full-year estimates. We expect a stronger FY18 with better marketing programmes and higher margin with the stronger MYR against USD. Maintain OUTPERFORM and TP of RM8.30 based on 21x FY18E EPS implying -0.5SD of its 5-year mean Fwd. PER.

FY17 within expectations. FY17 NP of RM52.6m (-4% YoY) came in within both our/consensus expectations at 96% of full-year estimates. A 4th interim DPS of 5.0 sen and a special DPS of 7.5 sen was declared, bringing FY17 DPS to 27.5 sen, as expected (dividend pay-out at 86%).

YoY, FY17 revenue declined by 10%, attributed to a strong sales base in FY16 ahead of the price increases (in February and April 2016) and major promotion programmes (40th Anniversary celebration). Gross profit margin was slightly affected (-0.2pp to 24.8% from 25.0% in FY16) by the higher import costs (as at FY17, the average of USD/MYR at RM 4.2996/USD compared to RM4.1411/USD as at FY16). However, this was cushioned by the higher product prices for the year (average of 9.3%). Nonetheless, with the lower operating expenses by 15% due to lower marketing provisions, FY17 net profit decreased at a lower rate of 4%, with expanded net profit margin by 0.3pp to 5.3% from 5.0% in FY16.

QoQ, 4Q17 net profit fell by 10% underpinned by the higher operating expenses by 8% due to higher sales incentives for ABO performance in 2017, and higher effective tax rate of 24.5% (3Q17:23.1%).

Outlook. Moving forward, with the start of a new Amway Business Owners (ABO) performance year 2018, Amway Headquarters’ 60 years anniversary programmes, and the recent strengthening of MYR against USD, the group’s position will be strengthened with expected net profit growth at average of 17% per annum over the next two years (90% of its products costs are in USD and every 1% appreciation in MYR against USD will increase our FY18E NP by 10%, and vice versa). Management noted that they would continue to proactively focus on strategies to: (i) effectively manage operating costs to offset pressure on profitability and (ii) implement various sales and marketing initiatives, as well as ABO experience-related infrastructure to support the ABOs.

Maintain OUTPERFORM call with unchanged Target Price of RM8.30 based on 21x FY18E EPS implying -0.5SD of its 5-year mean of Fwd. PER. We believe the 21x PER is justified considering AMWAY net profit growth at an average of 17% per annum over the next two years. We like the stock for the following: (i) beneficiary of a stronger MYR with expected improvement in net profit growth averaging at 17% per annum over the next two years, (ii) yearly record sales since IPO with its 7% MLM industry market share (from c.RM15b in potential industry value), (iii) steady dividend yield of 4.6% with dividend policy ratio of no less than 80% of PATAMI. Risks to our call include: (i) lower-than-expected sales, and (ii) unfavourable forex.

Source: Kenanga Research - 28 Feb 2018