FY19 NP of RM51.2m (-6% YoY) came in close within our estimate at 95%, but below consensus expectation at 91%. We believe that Amway’s import cost has risen as a result of hedging the MYR against USD at a weaker rate for the 3QFY19-2QFY20 period. And given the weak currency outlook, there is a risk that cost will stay high. As such, we cut FY20E net profit by 15% and our TP to RM5.10 (from RM5.90). Maintain MARKET PEFORM.

FY19 within our expectation. FY19 NP of RM51.2m (-6% YoY) came in close within our estimate at 95%, but below consensus expectation at 91%. A 4th interim DPS of 5.0 sen and a special DPS of 7.5 sen was declared for the quarter, bringing FY19 DPS to 27.5 sen (FY18: 27.5 sen), as expected.

YoY, FY19 net profit decreased by 6%, due to: (i) softer revenue (-1%), and (ii) contraction in PBT margin by 0.5ppt to 6.7% from 7.2% in FY18 from higher bonus and sales incentives in line with higher 4Q sales and Amway Business Owners (ABO) qualification tracking. This was despite: (i) higher GP margin by 0.5ppt to 25.2% from 24.7% in FY18 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), and (ii) lower effective tax rate of 20.7% (FY18: 22.3%) from recognition of deferred tax.

QoQ, 4QFY19 NP increased by 8%, in line with (i) better revenue (+8%) from seasonally stronger year-end sales promotion event as well as (ii) lower effective tax rate of 0.5% (3QFY19: 25.5%) from recognition of deferred tax. This was despite contraction in PBT margin by 1.6ppt to 4.5% from 6.1% in 3QFY19 from higher bonus and sales incentives in line with higher sales. GP margin only increased marginally by 0.1ppt to 24.9% from 24.8% in 3QFY19 from the high import cost primarily attributed to unfavourable foreign exchange impact (unfavourable hedge rate with its principal, which we believe was set at RM4.17/USD starting 3QFY19 compared RM4.00/USD, previously).

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 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 until 2QFY20 (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.

We cut FY20E net profit by 15% given the prolonged weakness in USD/MYR forex rate.

Maintain MARKET PERFORM with a lower TP of RM5.10 (from RM5.90) based on unchanged 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 - 27 Feb 2020