Amway’s 1HFY13  results  were  below  expectations,  representing  only 44%  of  consensus  and  our  full  year  forecasts.  Revenue  improved  by 8.5%  y-o-y  but  earnings  dipped  0.2%  y-o-y,  dragged  down  by  higher operating costs. We trim our FY13 and FY14 earnings by 5.7% and 5.1% respectively, resulting in a lower FV of MYR11.75. Maintain NEUTRAL. 
 
- Below  estimates.  1HFY13  revenue  expanded  by  8.5%  y-o-y  to MYR399.2m,  from  MYR367.9m,  mainly  due  to:  i)  improved  distributor productivity,  supported  by  sales  and  marketing  programs,  and  ii) increased sales ahead of hikes to its product prices effective 1 Feb and 1 April this year. Net profit dipped marginally by 0.2% y-o-y to MYR46.8m, from  MYR46.9m,  due  to  an  increase  in  sales  and  marketing  expenses (+8% y-o-y). Q-o-q, revenue dropped by 4.2% but earnings increased by 2.7% on the back of lower sales and marketing expenses (-4.1%). Vis-à-vis  2Q12,  2Q13’s sales were  higher  by  3.6%  while  net  profit  trended lower by 5.9%, no thanks to higher operating expenses (+4.5%).  

- Lower margins. The group’s gross profit and EBIT margin both softened by  1.4ppt  y-o-y,  mainly  due  to  higher  cost  of  sales  (+10.8%  y-o-y)  and steeper  operating  expenses  (+8%  y-o-y).  An  interim  single-tier  dividend of 10 sen/share was declared this quarter. 

- Revisiting  our  forecasts.  Given  the  higher-than-expected  operating costs, we are revising downward our FY13 and FY14 earnings estimates by  ~5%.  Key  investment  risks  are:  i)  a  decline  in  consumer  spending power;  ii)  intensifying  competition;  iii)  unfavourable  forex  rate (USD:MYR)  in  annual  pricing  review;  and  iv)  inability  to  pass  on  higher costs to consumers.

- Maintain  NEUTRAL.  With  its  strong  market  presence  and  well-known brandnames, we believe Amway is on track to deliver satisfactory results moving  forward.  Our  FV  is  adjusted  to  MYR11.75  (from  MYR11.80), based  on a  DDM  valuation.  Given  that  the stock  is  trading at  a  forward P/E  of  19x,  which  is  on  par  with  its  3-year  historical  P/E  of  18x,  we maintain our NEUTRAL call. Dividend yield remains decent at >5%.

Source: RHB