9MFY19 NP of RM39.7m (+22% YoY) came in within both our and consensus expectations, making up 70% each of fullyear estimates. Given the prolonged weakness in USD/MYR forex rate, we believe Amway was on the unfavorable side during the hedging rate fixing for inventory bought in 3QFY19. Nevertheless, we expect a better 4QFY19 sales from year-end promotion to cushion the higher products cost. Maintain MP with a TP of RM5.90.

9MFY19 within expectations. 9MFY19 NP of RM39.7m (+22% YoY) came in within both our and consensus expectations, making up 70% each of full-year estimates. A 3rd interim DPS of 5.0 sen (3QFY18: 5.0 sen), was declared for the quarter, bringing 9MFY19 DPS to 15.0 sen (9MFY18: 15.0 sen), as expected.

YoY, 9MFY19 NP surged 22%, on softer revenue (-1%), thanks to: (i) expansion in PBT margin by 1.5ppt to 7.4% from 5.9% in 9MFY18 due to lower bonus and sales incentives in line with lower sales and Amway Business Owners (ABO) qualification tracking, as well as, (ii) higher GP margin by 2.4ppt to 25.4% from 23.0% in 9MFY18 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 3QFY18 until 2QFY19). This was despite higher effective tax rate of 25.1% (9MFY18: 23.8%) from nondeductible expenses.

QoQ, 3QFY19 NP plunged 43%, despite better revenue (+2%), largely due to lower GP margin by 2.8ppt to 24.8% from 27.6% in 2QFY19 from the high import cost primarily attributed to unfavourable foreign exchange impact (unfavourable hedge rate with its principal, which we believe is at RM4.17/USD starting 3QFY19 compared RM4.00/USD, previously). Furthermore, there were also higher bonus and sales incentives pay-outs in line with higher sales and ABO qualification tracking, which in turn further eroded PBT margin by 4.5ppt to 6.1% from 10.6% in 2QFY19.

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. Note 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 3QFY19 inventory (the hedge rate is higher, compared to RM4.00/USD, previously). Nevertheless, we are positive on the group’s long-term focus such as: (i) effectively managing operating costs to offset pressure on profitability, and (ii) implementing various sales and marketing initiatives, as well as ABO experience-related infrastructure to support them.

Maintain MARKET PERFORM with unchanged TP of RM5.90 based on 16x FY20E EPS (-2.0SD of its 5-year historical mean PER).

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

Source: Kenanga Research - 21 Nov 2019