FY20 CNP of RM47m came in within expectations at 95% of both our/consensus forecasts, due to stronger-than expected sales spurred by Covid-19-related products. Moving ahead, revenue looks to be supported by sustained demand for heath supplements and home-care products amid the pandemic. However, higher import costs from a weak MYR could continue to dampen profitability. Maintain MP with higher TP of RM5.45 following an earnings upgrade.

Within. FY20 CNP of RM47m came in within both our and market estimates at 95%. DPS declared for the year was as expected at 27.5 sen implying a 106% payout ratio (FY19: 88%).

Weak margins. YoY, FY20 revenue increased by +19% due to higher demand for immunity boosting supplements, new product launches and home appliances amid COVID-19, as well as favourable response towards marketing promotions and various initiatives to support ABOs (Amway Business Owners). Nonetheless, PBT declined by 3% owing to: (i) higher ABO incentives, and ii) weaker Ringgit which led gross margin (GP) margin to contract by 5.7ppt to 19.5%. CNP fell 8% owing to the above and a higher tax rate of 25% as certain expenses were not deductible for tax purposes.

QoQ, 4QFY20 revenue contracted 2% due to timing difference of promotions and overwhelming response for new product launch in preceding quarter. PBT fell 77% to RM5.0m due to higher sales incentive and a lower operating expenses base in the third quarter which included reversal of non-cash award accrual due to event cancellation. As such, CNP fell 73% to RM5.0m mitigated by a lower tax rate of 15%.

Moving ahead, we believe the group’s top-line should continue to be supported by the growing demand for health supplements and home care products following the shift in consumer shopping patterns brought by the global pandemic. While higher incentives for ABO was a dampener, we believe given the recovery momentum expected for 2021, lesser incentives will be given. Nonetheless, the higher import costs from an unfavourable USD/MYR forex rate are likely to exert pressure on margin, leading to poorer profitability.

Post-results, we tweaked our FY21E earnings slightly by +2%, on housekeeping matters. Meanwhile, dividend forecasts are maintained at 27.5 sen per share for both FY21 and FY22 (implying a much lower payout of 83% and 77% respectively). Its net cash position at RM189m gives ample room for a higher payout.

Maintain MARKET PERFORM with a higher TP of RM5.45 (from RM5.20) following the earnings upgrade. Our TP is based on 16.5x FY21E EPS (near -1SD of its 5-year historical mean PER). While we believe recovery momentum is inevitable, an unfavourable Ringgit will put a dampener on profitability. Nonetheless, the stock still offers an exciting dividend yield of c.5%, which could be attractive to yield seekers.

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

Source: Kenanga Research - 25 Feb 2021