1HFY20 NP of RM27.0m (-7%) came in at 60%/62% of our/consensus full-year estimate. We deemed the results as within our expectation as we expect stronger sales ahead to be offset by higher import costs from the unfavorable hedging rate at c.RM4.36/USD, effective for 3QFY20 inventory until 2QFY21 (the hedge rate is higher, compared to RM4.17/USD previously). Maintain MP with a TP of RM5.10 based on 16x FY21E EPS (-2.0SD to its 5-year historical mean PER).

1HFY20 within our expectation. 1HFY20 NP of RM27.0m (-7%) came in at 60%/62% of our/consensus full-year estimate. We deemed the results as within our expectation as we expect stronger sales ahead to be offset by higher import costs. A 2nd interim DPS of 5.0sen was declared for the quarter, bringing YTD-DPS to 10.0sen (1HFY19:10.0sen), as expected.

YoY, 1HFY20 net profit declined 7%, despite higher sales (+8%), mainly due to (i) contraction in GP margin to 19.4% compared to 1HFY19 at 25.6% from 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 for the period of 3QFY19-2QFY20 compared to RM4.00/USD, previously), and (ii) slightly higher effective tax rate of 25.2% compared to 25.0% in 1HFY19.

QoQ, 2QFY20 net profit surged 65% due to unprecedented sales volume since 2016 (+20%) from favourable response towards marketing promotions and higher demand for immunity boosting supplements, air treatment and home appliances amid the COVID-19 pandemic. This was further boosted by; (i) lower effective tax rate of 24.4% compared to 26.5% in 1QFY20, and (ii) lower operating expenses (-24%), from the operation cut-back and stores closure during the lockdown. This more than offset the contraction in GP margin to 17.8% compared to 1QFY20 at 21.4% from the high import cost ratcheted by unfavourable foreign exchange impact.

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 RM4.36/USD, and effective for 3QFY20 inventory until 2QFY21 (the hedge rate is higher, compared to RM4.17/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.

Maintain MARKET PERFORM with a TP of RM5.10 based on 16x FY21E EPS (-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 - 21 Aug 2020