9M18 NP of RM32.6m (-17%) came in above our expectation but within consensus’ at 84%/70% of full-year estimates, respectively, which was only due to the lower-than-expected effective tax rate exposure in 3Q. As such, we increase: (i) FY18-19E NPs by 7-4%, to reflect the lower tax exposure, and (ii) TP to RM6.80 from RM6.50. The share price had retraced 11% since our UNDERPERFORM call, and we believe the negatives have been priced in. Upgrade to MARKET PERFORM.

9M18 above our expectation. 9M18 NP of RM32.6m (-17%) came in above our expectation but within consensus’ at 84%/70% of full-year estimates, respectively, which was only due to the lower-than-expected effective tax rate exposure in 3Q. A 3rd interim DPS of 5.0 sen was declared, bringing 9M18 DPS to 15.0 sen (9M17:15.0 sen), within expectations.

YoY, 9M18 NP plunged 17% despite a marginal drop in revenue (-1%) mainly attributed to: (i) lower gross profit margin by 1.6ppt to 23.0% from 24.6% in 9M17 due to higher import costs with the weaker MYR against USD, and (ii) higher effective tax rate of 29.2% (9M17:25.6%) as certain expenses were deemed not deductible for tax purposes in the 1H18. The group revenue only started to improve in 3Q18 as 1H18 sales was affected by consumers holding back purchases prior to the 14th general election.

QoQ, 3Q18 NP surged 130% buoyed by: (i) lower effective tax rate of 20.1% (2Q18:49.9%), (ii) higher sales (+14%) attributed to the stronger ABOs’ momentum towards the conclusion of Performance Year 2018 and the start of the new Performance Year 2019 as well as supported by the zero-rated tax-holiday, and (iii) improved gross profit margin by 1.2ppt to 24.2% (2Q18: 23.0%), 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. Management noted that FY18 sales growth will be flattish as consumers are still adjusting to sudden changes in products pricing, despite the boost in sales for 3Q18 from the zero-rated tax holiday and conclusion of Performance Year 2018. 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, we are positive on the group long-term focus that they will continue to: (i) effectively manage operating costs to offset pressure on profitability, and (ii) implement various sales and marketing initiatives, as well as Amway Business Owners (ABO) experience-related infrastructure to support the ABO.

FY18-19E NPs increased by 7-4%. We increased our FY18E and FY19E net profits by 7% and 4%, respectively, to account for the lower effective tax exposure.

Upgrade to MARKET PERFORM from UNDERPERFORM with a higher TP of RM6.80 (from RM6.50). We upgrade our TP to RM6.80 from RM6.50 based on unchanged 19.5x FY19E EPS, implying -2SD of its 5-year historical mean forward PER. The share price had retraced 11% since our UNDERPERFORM call, and we believe the negatives have been priced in. Upgrade to MARKET PERFORM.

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

Source: Kenanga Research - 15 Nov 2018