We came back from Amway’s FY16 analyst briefing feeling positive on the strategic plans in store, i) to mitigate the soft market condition, ii) by being prudent with operating expenses and iii) continuous support to deliver enhanced services to customers. Despite management being cautious on the softer market condition and weakening of Ringgit, Amway is resilient in complying with its 80% dividend policy given its healthy cash flow. We adjust earnings higher for FY17 and FY18 by 1.8% and 5.6% respectively. We upgrade Amway’s TP to RM9.59/share and call from Sell to BUY.

Mitigating Softer Economic Condition

Amway’s FY16 revenue increased by 6.4% YoY to RM1.1bn on the back of i) stronger buy up ahead of the price increase in Feb and Apr of 2016, ii) positive response from the launch of Amway’s 40th anniversary programmes and iii) higher selling prices. Moving forward, management guided that more products will be launched in FY17. Furthermore, we can expect price increases in some of Amway’s non-core product lines so that the group’s margins would not be eroded further by ringgit weakness and the soft market condition. As illustrated in figure 1, the consumer sentiment index level is still below 100. Consequently, we expect that revenue to partly improve due to more product offerings from Amway through strategic pricing of products. However, we do not expect double-digit growth of revenue for FY17 as the volume will be dragged down due to low consumer sentiment.

Prudent with Operating Expenses to Help with Margin

Rise in import costs (from weakening of Ringgit and higher product prices) as well as increase in operating expenses in FY16 have caused the core profit margin to contract by 1.4p.p. YoY to 4.8%. Note that more than 80% of Amway’s products are imported and mainly denominated in USD. Management guided that for FY17, Amway will be prudent in managing the operating expenses due to the absence of heavy marketing and promotional expenses needed for the 40th anniversary programmes. In terms of import costs, we believe that Amway’s centralised procurement system of annual fixed USD rate to MYR could help reduce USD exposure. Taking all these into consideration, we estimate that Amway’s net profit margin to improve by up to 1.0p.p

Continuous Support for Amway Business Owners

The ABO are the main drivers of Amway’s earnings hence no surprise that the group will continue to support the ABO to stimulate sales. Management advised that next month, the group will be launching a mobile revolution platform so ABO are able to conduct businesses on the go. We are positive on this development as Amway will be able to streamline its internal processes and have faster turnaround between orders and deliveries therefore enhancing the group’s service culture. We expect that with the implementation of the mobile platform coupled with continuous support for the ABO, Core ABO Force could improve by up to 1% YoY and productivity could increase by around 5%-10% YoY hence contributing to better sales.

80% Dividend Policy

In tandem with the contraction in margin due to increased costs pressure, total GDPS declared for FY16 was 30 sen/share instead of 45 sen/share in FY15. This resulted in a dividend pay-out ratio of 90.2% for FY16. Despite lower earnings, management advised that 80% dividend policy is maintained given the healthy level of operating cash flow and limited CAPEX requirement.

Outlook

Taking all into consideration, we believe that Amway will be able to bounce back from the drawbacks of weakening of Ringgit and soft market condition through strategic actions which will enhance its services and product offerings thus providing differentiation from its competitors. On top of that, Amway’s attractive dividend policy will further keep shareholders’ trust in the business. Downside risks to Amway’s earnings are i) more-than-expected increase in costs, ii) further weakening of Ringgit and iii) declining in productivity of Core ABO Force.

Valuation

Overall, we increase our FY17 and FY18 core earnings by 1.8% and 5.6% respectively taking into consideration Amway’s strategic plans to improve margins amid softening of market condition and weakening of Ringgit. Target price is raised to RM9.59/share (previously RM8.00/share) based on DDM valuation and stock call is upgraded from Sell to Buy.

Source: TA Research - 27 Feb 2017