Although only making up 18%/19% of our/consensus full-year estimates, 1Q19 NP of RM10.6m (+33% YoY, -52% QoQ) is deemed within expectations as 1Q is generally the group’s weakest quarter. Maintain OP with a higher TP of RM7.25 from RM6.80 as we roll the valuation to FY20E based on an unchanged PER of 19.5x, implying -2SD of its 5-year historical mean forward PER.

1Q19 deemed within expectations. 1Q19 NP of RM10.6m (+33% YoY, -52% QoQ) is deemed within expectations despite only making up 18%/19% of our/consensus full-year estimates as 1Q is generally the weakest quarter for the group. A 1st interim DPS of 5.0 sen (1Q18: 5.0sen), was declared for the quarter as expected.

YoY, 1Q19 NP surged 33% boosted by: (i) stronger sales (+5%) due to positive Amway Business Owner (ABO) sales momentum and marketing plans for Performance Year (PY) 2019, as well as product buy-up ahead of a price increase effective mid-March 2019 (on average 2% for all products range), (ii) lower effective tax rate of 25.9% (1Q18: 27.3%), and (ii) higher PBT margin by 1.1ppt to 5.8% from 4.7% in 1Q18 from the lower import cost primarily attributed to favourable foreign exchange impact (which we believe was attributed to better hedge rate with its principal at RM4.00/USD starting 3Q18. AMWAY typically negotiates with its principal in 2Q, and the new forex rate will be effective for inventory bought in 3Q).

QoQ, 1Q19 NP plunged 52%, despite a marginal drop in revenue (- 0.6%), mainly from: (i) higher effective rate of 25.9% (4Q18: 20.1%), and (ii) lower PBT margin by 5.2ppt to 5.8% from 11.0% in 4Q18 due to unfavourable products mix. Note that, 1Q19 is generally the weakest quarter for the group. The effective tax rate for 4Q18 and FY18 was lower than the statutory tax rate mainly due to a reduced tax rate on incremental taxable income which was granted by the Inland Revenue Board Malaysia under the 2017 Budget, and over provision of tax for FY17.

Outlook. Management highlighted that sales growth in 2019 will be 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’s 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.

Maintain OUTPERFORM with a higher TP of RM7.25 as we roll over our valuation to FY20E (from FY19E) based on an unchanged PER of 19.5x, implying -2SD of its 5-year historical mean forward PER. We like the stock for the following: - (i) beneficiary of expected stronger MYR rate (currently on hedging rate of c.RM4.00/USD effective until next revision tentatively this month and on inventory effective of 3Q) with expected improvement in net profit growth averaging at 7% per annum over the next two years, and (ii) steady dividend yield of 4.7% with a dividend payout policy of no less than 80% of PATAMI.

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

Source: Kenanga Research - 30 May 2019