AMWAY’s FY21 results came below expectations on account of higher-than-expected distribution expenses in the 2HFY21 as sales and renewal fees weakened. Margins dipped due to the double combination of higher expenses and unfavorable USD/MYR forex. We cut FY22E earnings by 6% and lower TP to RM5.65 pegged to an unchanged PER valuation of 17.6x, downgrade call to MARKET PERFORM.

Below expectation. FY22 PATAMI of RM37m came in below expectations at 66%/65% of our/consensus estimates due to higher than-expected pay-out for the new sales incentives plan introduced in 2021. Final dividend declared was also below at 24.0 sen (vs. our expectation of 35.0 sen).

YoY, FY21 top-line surged 29%, up to RM1.48b on account of demand for its nutrition and wellness products in this pandemic era as well as strong field momentum underpinned by the AMWAY Privileged Customer (APC) programme and newly introduced sales incentives plan. Higher costs of inputs saw GP margin eroded by 160bps to 18% with additional erosion in EBIT margin (-210bps) on account of higher payout as mentioned above. Coupled with slightly higher ETR (+120bps) PATAMI ended at RM36.8m (-22%).

QoQ, with the resumption of business activities, 4QFY21 top-line grew moderately (+2%) to RM392.4m as sales of consumer products eased by +2% and sign-up & renewal fees remained flattish at RM4.2m. PBT fell 89% to RM1.8m underpinned by higher cost of inputs and higher expenses (coming from higher sales pay-out).

Sign-up and renewal fees weakening. The higher sales incentives and provisioning was a surprise but we believe it was unavoidable, as sign-up & renewal fees declined (-24% YoY and flattish YoY) implying declining growth in ABOs as economic activities gradually reopen. 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 was 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 likely improving on account of lower distribution expenses.

Post results, we slashed our FY22E earnings by 6% to RM53m on account of persistent high inputs and an unfavourable MYR. We also introduce our FY23E earnings.

MARKET PERFORM with a lower TP of RM5.65 (from RM6.05) pegged to FY22E PER of 17.6x (unchanged) implying 1SD below its 5- year mean. The lower PER is justified given its pre-pandemic PER trading levels of c.18x when the Ringgit started to turn unfavourable.

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

Source: Kenanga Research - 24 Feb 2022