1H19 NP of RM29.1m (+89% YoY) came in within both our and consensus expectations, making up 51% each of fullyear estimates. Given the prolonged weakness in USD/MYR forex rate, we believe Amway was on the unfavorable side during the 2Q hedging rate negotiations effective for inventory bought in 3Q. However, this will be cushioned by new stock-up activities in 2H19. Maintain MP with a TP of RM5.90.

1H19 within expectations. 1H19 NP of RM29.1m (+89% YoY) came in within both our and consensus expectations, making up 51% each of full-year estimates. A 2nd interim DPS of 5.0 sen (2Q18: 5.0 sen), was declared for the quarter, bringing 1H19 DPS to 10.0 sen (1H18:10.0 sen), as expected.

YoY, 1H19 NP surged 89% boosted by: (i) stronger sales (+3%) 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 and midApril 2019 (on average 2% for all products range), (ii) lower effective tax rate of 25.0% (1H18: 27.4%), and (ii) expansion in PBT margin by 3.5ppt to 8.1% from 4.6% in 1H18 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, 2Q19 NP rose 74%, despite softer revenue (-7%), mainly from: (i) expansion in PBT margin by 4.8ppt to 10.6% from 5.8% in 1Q19 due to lower bonus and sales incentives in line with lower sales and ABO qualification tracking, as well as (ii) lower effective tax rate of 24.5% (1Q19: 25.9%). The lower sales were affected by the timing of buy-up activities in 1Q19 ahead of pricing hike in mid-March/April.

Outlook. Given the prolonged weakness in USD/MYR forex rate, we believe Amway was on the unfavorable side during the hedging rate negotiations which should have taken place earlier in April/May. Noted that, Amway uses the Bloomberg 1-year forward rate as a hedge rate base, which we believe was at RM4.17/USD, and will be effective for 3Q inventory. Nevertheless, 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 MARKET PERFORM with unchanged TP of RM5.90 based on 16x FY20E EPS (-2.0 SD of its 5-year historical mean PER).

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

Source: Kenanga Research - 22 Aug 2019