This article first appeared in The Edge Financial Daily, on May 19, 2016.

Amway (M) Holdings Bhd
(May 18, RM9.15)
Maintain sell with a target price (TP) of RM8.57: Amway (M) Holdings Bhd’s first quarter ended March 31, 2016 (1QFY16) net profit plunged 51% year-on-year (y-o-y) to RM18 million, accounting for 32% and 26% of our and the street’s estimates respectively. The board declared an interim dividend of five sen per share for the quarter, which was five sen per share short compared to a year ago.  

The group’s revenue dropped by 5% y-o-y to RM305.9 million due to a high-base effect in 1QFY15, which saw a slew of stock-up activities prior to the implementation of the goods and services tax in April 2015.

Operating costs amplified by 26.7% y-o-y, resulting in operating profit shrinking as much as 50.3% y-o-y to RM24.9 million. The rise in operating costs was underpinned by higher import costs due to a weaker ringgit and higher sales incentive provisions. We deem its 1QFY16 results in line with our expectations as we expected a weaker quarter moving forward. As such, we make no changes to our earnings forecasts.

Moving forward, we believe its sales volume will decline further owing to price increases last November. Note that Amway’s sales are vulnerable to price increases as its products are mainly high-ticket items.

Other anticipate-able risks in the near term include the impact of further weakening in the ringgit against the US dollar on importation costs. Note that 70% to 80% of its product costs are denominated in US dollars.

We maintain “sell” on Amway with a TP of RM8.57, based on the dividend discount model valuation (cost of equity: 6%; growth: 2.5%), supported by underlying risks arising from a broad increase in operating expenses. Its dividend yields are estimated to be approximately 3.3% and 3.4% for FY16 and FY17 respectively. — TA Securities, May 18