AMWAY results were above expectations on account of higher demand for Health & Home products. While gross margin was a dampener, EBIT saw improvement back to its pre-pandemic levels. We roll over our valuations to FY22E and raised our TP to RM5.90. Upgrade to OUTPERFORM.

Above expectations. 3MFY21 CNP of RM20m came in above our/market estimates at 37%/36%, respectively, due to exceptional growth in top-line. DPS of 5.0 sen is in line (3MFY20: 5.0 sen).

Unprecedented demand. YoY, 3MFY21 top-line surged 51% to RM354m due to higher demand for Nutrition & Wellness Products and Home appliances as compared to last year during the early stages of the pandemic. Launching of the new customer segment Amway Privileged Customer (APC) in January 2021 solidified the revenue path – Jan 2021 saw +420% YoY rush in new ABO (Amway Business Owners) and APCs. Gross margin remains a dampener shedding 150bps to 20% due to unfavourable Ringgit but EBIT margin improved 160bps to 8% coming from lower transfer pricing impact, offset by higher ABO Sales incentives and higher operating expenses in line with higher sales. With no significant change in ETR, CNP ended at RM20m (+98%).

QoQ, in comparison from the preceding quarter, top-line rebounded 12%. Gross margin shed slightly by 50bps with Opex margin shedding 7ppt to 12.5% resulting in EBIT improving by >100% to RM27m or 6ppt improvement in margin to 8%.

No let-up in growth as pandemic prevails. Given the prolonged pandemic, 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 dampening immediate impact, we expect less incentives will be given in 2HFY21 as the recovery momentum builds up. Nonetheless, the higher import costs from an unfavourable USD/MYR forex rate are likely to exert pressure on margin, leading to poorer profitability. As top-line hit unprecedented level due to the pandemic, the vaccination herd immunity that is expected to be achieved in 2022 will likely moderate 2022 earnings as margins and growth revert back to pre-pandemic levels.

Post results, we revised our FY21E/FY22E earnings by +14%/-9% as we view growth to normalize in 2022. Given its net cash position, we revise DPS to 35.0 sen (from 28.0 sen) implying a payout of 92% (from 82% previously). Its net cash position at RM162m gives ample room for a higher payout.

OUTPERFORM with a higher TP of RM5.90 (from RM5.45) as we roll over our valuation base to FY22E PER of 18x (from 16x) with a -0.5SD attached. The higher PER is justified given its pre-pandemic trading levels of between 18x to 20x PER but given the unfavorable Ringgit compounding a soft GP margin, we attached 0.5SD below mean. Coupled with an offer of an exciting dividend yield of c.7% we upgrade it to OUTPERFORM.

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

Source: Kenanga Research - 27 May 2021