1Q18 NP of RM8.0m (-16% YoY, -41% QoQ) came in below both our/consensus expectations at 12% of full-year estimates due to the higher-than-expected import costs. As such, we cut our FY18-19E NP by 17-7%. Downgrade to MARKET PERFORM from OUTPERFORM with a higher TP of RM8.50 as we roll over our valuation year to FY19E (from TP of RM8.30 based on FY18E EPS).

1Q18 Below Expectations. 1Q18 NP of RM8.0m (-16% YoY, -41% QoQ) came in below both our and consensus expectations at 12% of full-year estimates due to the higher-than-expected import costs which we believe was attributed to the higher hedge rate of above RM4.20/USD compared to the 1Q18 actual rate of RM3.86/USD. A 1st interim DPS of 5.0 sen was declared, within expectation.

YoY, 1Q18 NP fell by 16% attributed to the lower gross profit margin by 2.1ppt to 21.7% from 23.8% in 1Q17 which we believe was due to the higher hedge rate of above RM4.20/USD compared to the 1Q18 actual rate of RM3.86/USD as well as a marginal decrease in sales. 1Q18 sales was impacted by the adoption of “Malaysian Financial Reporting Standard 15 (MFRS 15) Revenue from Contracts with Customers”, which became effective from 1st January 2018. The MFRS 15 reclassify the revenue recognition of ABO personal sales and ABO group sales into different standard basis. Excluding the adjustment arising from MFRS 15, the group revenue was higher by 2% to RM240m attributed to the favourable response toward the marketing plan of the new performance year 2018.

QoQ, 1Q18 NP plunged 41% dragged by: (i) lower sales (-6%) due to the higher sales base in 4Q17 from the new product launches, (ii) lower gross margin by 3.8ppt to 21.7% from 25.5% in 4Q17 due to the higher ABO bonus paid for performance year 2017, and (iii) higher effective tax rate of 27.3% (4Q17:24.5%).

Outlook. We believed that the sales growth for 1H18 would be flattish as consumers were adopting a “wait-and-see” attitude prior to the 14th General Election. Nonetheless, with the expected abolishment of GST by the new government coalition, AMWAY sales may see a slight recovery in 2H18 and FY19. On the other hand, hedging import costs will depend on AMWAY’s negotiations with supplier. 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.

Cut FY18-19E NP by 17-7%. We cut FY18E and FY19E NPs by 17% and 7%, respectively, to take into account the higher import costs.

The share price had appreciated 15% since our last upgrade to OUTPERFORM with our previous TP of RM8.30 (based on 21x FY18E EPS). Thus, we downgrade to MARKET PERFORM with a higher Target Price of RM8.50 as we roll over our valuation year to FY19E. Our new valuation is based on 21x FY19E EPS implying -0.5SD of its 5-year historical mean Fwd. PER.

Risks to our call include: (i) lower-than-expected sales, and (ii) unfavourable forex.

Source: Kenanga Research - 17 May 2018