1QFY20 NP of RM10.2m (-4% YoY, -11% QoQ) came in within our/consensus expectation at 23%/21% of full-year estimate. Post-MCO, the group will continue to invest in critical e Commerce related infrastructure and attractive incentives linked growth strategy to better serve the ABOs (Amway Business Owners). Nevertheless, the group anticipates that such support measures, and the economic impact of COVID- 19 will exert pressure on its near-term operating margins. Maintain MP with a higher TP of RM5.10 (from RM4.40) as we roll over valuation base to FY21E (from FY20E).

1QFY20 within expectations. 1QFY20 NP of RM10.2m (-4% YoY, - 11% QoQ) came in within our/consensus expectation at 23%/21% of full-year estimate. A 1st interim DPS of 5.0 sen was declared for the quarter, as expected.

Results’ highlights. 1QFY20 net profit declined 4% YoY and 11% QoQ due to softer sales (-5% YoY, -7% QoQ) due to shops closure following the government's imposition of Movement Control Order (MCO) to control the pandemic outbreak of COVID-19. This was worsened by: (i) contraction in GP margin to 21.4% compared to 1QFY19 at 23.8% and 4QFY19 at 24.9% from the high import cost primarily ratcheted by 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), and (ii) higher effective tax rate of 26.5% compared to 25.9% in 1QFY19 and 0.5% (recognition of deferred tax) in 4QFY19.

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 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. Post-MCO, the group will continue to invest in critical e-Commerce related infrastructure as well as a more attractive incentives-linked growth strategy to better serve the ABOs and place them in a stronger position to take advantage of future megatrends. However, the group anticipates that such support measures and the economic impact of COVID-19 will exert pressure on its near-term operating margins.

Maintain MARKET PERFORM with a higher TP of RM5.10 (from RM4.40) as we roll over valuation base to FY21E EPS (from FY20E EPS) based on unchanged PER of 16x (-2.0SD to 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 - 24 Jun 2020