1H18 NP of RM15.4m (-36%) came in below our/consensus expectations at 29%/27% of full-year estimates, respectively, due to the lower-than-expected sales. As such, we cut our FY18-19E NP by 28-17%. Downgrade to UP from MP with a lower TP of RM6.50 from RM7.90. We believe FY18 sales growth will be flattish as consumers are still adjusting to sudden changes in pricing, despite the expected boost in sales for 3Q18 from the zero-rated tax holiday.

1H18 below expectations. 1H18 NP of RM15.4m (-36%) came in below our and consensus expectations at 29% and 27% of full-year estimates, respectively, due to the lower-than-expected sales, as ABO (Amway Business Owners) were holding back purchases prior to the zero-rated GST (which started on 1st June 2018), as well as 6% sales discount to cushion the expected weakness in sales (started on 16th May 2018). A 2nd interim DPS of 5.0 sen was declared, bringing 1H18 DPS to 10.0 sen (1H17:10.0 sen), within expectation.

YoY, 1H18 NP plunged 36% dragged by; (i) lower revenue (-5%) as consumers adopted a “wait-and-see” attitude prior to the 14th General Election, (ii) lower gross profit margin by 1.6ppt to 22.3% from 23.9% in 1H17 from the weaker MYR against USD, and (iii) higher effective tax rate of 38.3% (1H17:27.1%) because of certain expenses deemed not deductible for tax purposes.

QoQ, 2Q18 NP fell by 6% underpinned by; (i) lower sales (-3%) as ABO were holding back purchases prior to the zero-rated GST (which started on 1st June 2018), as well as 6% sales discount to cushion the expected weakness in sales (started on 16th May 2018), and (ii) higher effective tax rate of 49.9% (1Q18:27.3%). Nevertheless, this was cushioned by the improved gross margin by 1.3ppt to 23.0% (1Q18: 21.7%), which we believe was attributed to a better hedge rate with its principal at RM4.00/USD as compared to above RM4.20/USD in 1Q18/2H17 (AMWAY typically negotiates with its principal in 2Q).

Outlook. We believe that FY18 sales growth will be flattish as consumers are still adjusting to sudden changes in pricing of the products, despite the expected boost in sales for 3Q18 from the zero- rated tax holiday. Furthermore, we understand that the new SST will also be charged on imported products, which is unfavourable to AMWAY that imports 90% of its products from its principal in USA. Nevertheless, for the long-term focus, the group noted that they will 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 ABO.

Cut FY18-19E NP by 27.9%-17.4%. We cut FY18E and FY19E NPs by 27.9% and 17.4%, respectively, to take into account the lower sales.

Downgrade to UNDERPERFORM from MARKET PERFORM with a lower TP of RM6.50 (from a TP of RM7.90, previously), based on unchanged 19.5x FY19E EPS, implying -2SD of its 5-year historical mean forward PER.

Risks to our call include: (i) higher-than-expected sales, and (ii) lower- than-expected operating costs.

Source: Kenanga Research - 21 Aug 2018