AMWAY (M) HOLDINGS BHD

Target Price: RM7.50

POSITIVE sales momentum towards the end of the year is expected to sustain Amway’s earnings for the financial year ending Dec 31, 2017.

Following a set of results that came in line with expectations, Kenanga Research says it will not make changes to its earnings assumption for Amway, as the multi-level marketing (MLM) company is likely to see slightly positive sales momentum from yearend marketing programmes.

Kenanga Research reiterates its “market perform” call on Amway, with an unchanged target price of RM7.50 based on 19 times the estimated 2018 earnings for Amway.

The brokerage says the valuation is in line with -1.0 standard deviation of the five-year mean due to strong competition in the MLM industry, which could limit the distributor’s growth to single-digit.

Amway’s net profit of RM39.2mil for the nine months (9M) ended Sept 30, 2017, which represented a decline of 9% year-onyear (y-o-y), came in within expectations at 72% and 75% of Kenanga’s and consensus forecasts, respectively.

An interim dividend per share (DPS) of five sen was declared, bringing year-to-date DPS to 15 sen, which is within expectation.

Amway’s revenue declined 12% y-o-y to RM732.9mil for 9M2017, attributed to a strong sales base in 9M2016 ahead of the price increases (in February and April 2016) and major promotion programmes (40th Anniversary celebration).

“With the conclusion of Amway Business Owners’ Performance Year 2016 and 40th Anniversary programmes, sales momentum is expected to slow down for the year mainly due to lack of incentives and marketing programmes, along with weak consumer sentiment and economic headwinds,” Kenanga Research says.

“Nonetheless, the recent strengthening of the ringgit against US dollar has improved gross margins as 80% of the group products costs are in US dollar,” it adds.

Moving forward, Amway is expected to continue to proactively focus on strategies to effectively manage operating costs to offset pressure on profitability, implement various sales and marketing initiatives, and use Bloomberg US dollar/ringgit forecasted oneyear forward as a base to negotiate the hedge rate with its supplier Amway Global.