FY18 NP of RM54.5m (+4%) came in above our/consensus expectations at 130%/126% of full-year estimates, which was due to the lower-than-expected import costs. Nevertheless, we made no changes to our FY19E CNP, as we have factored in sufficient import costs. Upgrade to OP, from MP at an unchanged TP of RM6.80, as we believe value is emerging being the potential beneficiary of stronger MYR against USD.

FY18 above expectations. FY18 NP of RM54.5m (+4%) came in above our/consensus expectations at 130%/126% of full-year estimates, which was mainly due to the lower-than-expected import costs. A 4th interim DPS of 5.0 sen, and special DPS of 7.5 sen was declared, bringing FY18 DPS to 27.5 sen (FY17:27.5 sen), above expectations.

YoY, FY18 NP rose 4% despite a marginal drop in revenue (-1%) mainly attributed to lower effective tax rate of 22.3% (FY17:25.3%). Note that, the effective tax rate for the current quarter and FY18 was lower than the statutory tax rate mainly due to a reduced tax rate on incremental taxable income which was granted by Inland Revenue Board Malaysia under 2017 Budget and over provision of tax for the prior year. Furthermore, the group only recorded marginal drop in gross profit margin by 0.1ppt to 24.7% from 24.8% in FY17 due to lower import costs with the stronger MYR against USD rate in 2H18.

QoQ, 4Q18 NP surged 28%, despite a drop in revenue (-4%), mainly boosted by improved gross profit margin by 5.5ppt to 29.7% (3Q18: 24.2%), 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, and the new forex rate will be effective for inventory bought in 3Q. The lower revenue (-4%) was attributed to the higher base in 3Q18 from the positive response towards the sales and marketing plans driven by the conclusion of Performance Year 2018 and the start of Performance Year 2019 in 3Q18.

Outlook. Management highlighted that sales will grow in 2019 driven by positive ABO response toward their sales and marketing plan, as well as the various growth initiatives set up to support the ABOs in growing their businesses. We are positive on the group long-term focus 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.

Upgrade to OUTPERFORM from MARKET PERFORM with an unchanged TP of RM6.80 based on 19.5x FY19E EPS, implying -2SD of its 5-year historical mean forward PER. We believe that value is emerging for AMWAY as the potential beneficiary of stronger MYR against USD, given that 90% of its product costs are in USD. We like the stock for the following: - (i) beneficiary of a stronger MYR with expected improvement in net profit growth averaging at 7% per annum over the next two years, and (ii) steady dividend yield of 4.5% with a dividend payout policy of no less than 80% of PATAMI. Risks to our call include: (i) lower-than-expected sales, and (ii) higherthan-expected operating costs.

Source: Kenanga Research - 27 Feb 2019