AMWAY’s 9MFY21 results came below expectations on account of higher distribution expenses in the third quarter. Margins dipped due to the double combination of higher expenses and unfavorable USD/MYR forex. TP is lowered to RM6.05 pegged to a lower FY22E PER of 18x on account of the still unfavorable MYR. Maintained at OUTPERFORM given its solid dividend yields.

Below expectations. 9MFY21 PATAMI of RM36m came in below expectations at 57%/54% of our/consensus full-year estimates. The negative deviation, we believe was due to higher sales incentives and provision in view of higher number of qualifiers and higher input costs especially from the quarter in review. DPS of 5.0 sen was declared for the quarter bringing YTD DPS to 15.0 sen (in line).

Demand surge continued. YoY, 9MFY21 top-line of RM1.1b surged 31% due to continuous robust demand for nutrition & wellness products throughout the year. The demand was also underpinned by the AMWAY Privileged Customer (APC) and strong field momentum driven by the new Sales Incentive Plan introduced in Jan 2021. Higher costs of inputs saw GP margin eroded by 1.5ppt to 19% with EBIT margin down by 2.5ppt given the higher sales incentives and provisioning. With no significant change in ETR, PATAMI ended at RM36m (-16%).

QoQ, in comparison from the preceding quarter, top-line growth posted 8% to RM384m coming from continuous demand and sales from the newly launched product (Atmosphere Mini) coming from a higher base in the preceding quarter. Gross margin fell 2ppt to 17% while EBIT remained stable at 3%.

Sign-up and renewal fees weakening. The higher sales incentives and provisioning was a surprise to us but we believe it was unavoidable, as sign-up and renewal fees were declining (-34% QoQ and +5% YoY) implying declining growth in ABOs as economic activities gradually reopens. The higher incentives were an immediate dampener and we believe it is unsustainable as economic recovery builds up leading to moderating growth in ABOs. The unfavourable USD/MYR forex rate is an added pressure to margins, leading to lower profitability in the immediate term. As top-line were driven to unprecedented level due to the pandemic, the gradual reopening of the economy and the pandemic moving to the endemic stage will likely see FY22 top-line weakening on account of moderating ABOs but with earnings maintained due to lower distribution expenses.

Post results, we slashed our FY21E earnings by 11% with FY22E earnings enhanced by 5% due to its still large ABOs sustaining demand, though offset by an unfavourable MYR.

OUTPERFORM with a lower TP of RM6.05 (from RM6.20) pegged to FY22E PER of 17.6x (implying 1SD below its 5-year mean) from 19x previously. The lower PER is justified given its pre-pandemic PER trading levels of c.18x when the Ringgit started to turn unfavorable. Given its solid dividend yields, we maintain our OUTPERFORM rating.

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

Source: Kenanga Research - 18 Nov 2021