KUALA LUMPUR (Nov 16): Analysts revised higher earnings for Amway (M) Holdings Bhd on lower incentive costs for its Amway Business Owners (ABO), but said the same factor suggests sales could face headwinds.

In the coming year, the company could also see current elevated profit margins come under pressure, due to higher operating costs associated with the group’s business investments and marketing.

In a note, TA Securities Research raised Amway’s earnings forecast for the financial year ending Dec 31, 2023 (FY2023) by 65.2% — 30.5% for FY2024 and 29.3% for FY2025 — to reflect lower costs of goods sold and ABO payout structure.

However, the research house trimmed its target price (TP) to RM5.80 from RM5.90 and maintained its “hold” call. Its valuation is based on the dividend discount model (DDM) approach (discount rate: 8.4%; growth rate: 1%), with a higher discount rate of 9.8%.

“We maintain our cautious stance on the group’s prospects given the growing concern over the reducing ABO payouts, which could possibly suggest the weakened sales force and deceleration of sales growth momentum,” it said

 It also flagged saturated multi-level marketing space and rising competition at more affordable price points, although it expects the group to focus on improving ABO-centric programmes to stimulate demand.

Meanwhile, BIMB Securities Research raised its TP to RM5.70, from RM5.50, with a “hold” call, based on a new DDM valuation with a weighted average cost capital of 8.7% and lower terminal growth rate of 1%.

This as it revised its FY2023 earnings forecast upward by 49% and FY2024 earnings forecast upward by 35%, after adjusting its cost assumptions and lowering sales estimates.

Sales for Amway is expected to be muted in 4QFY2023, accompanied by slightly higher costs due to year-end sales promotions, it said.

“Looking ahead to FY2024, the sales outlook for Amway remains challenging amid inflationary pressures that impact consumers' ability and willingness to spend, especially on premium-priced products.

“Despite the expectation of lower ABO incentives cost, profit margins could be under pressure from current higher level, as we anticipate increased operating costs associated with business investments and marketing,” MIDF said.

“That said, Amway remains an attractive dividend play, offering a lucrative dividend yield of 8.1%-9.5% in FY2023-FY2025F],” said the research house.

Amway’s net profit for the third quarter ended Sept 30, 2023 (3QFY2023) more than doubled to RM46.21 million from RM18.75 million in the previous year’s corresponding quarter, mainly due to lower operating expenditure resulting from significantly reduced ABO incentives payouts, which were aligned with lower sales.

The improved profitability came after the group issued a profit warning in August, taking into consideration that inflation would squeeze consumers’ purchasing power and appetite to spend.

This was despite its quarterly revenue declining by 10.3% to RM333.47 million from RM371.79 million due to softer demand in health and wellness products and home appliances.

At the start of trading, Amway’s share price increased by 5.71% or 30 sen to RM5.55 from Wednesday’s closing price of RM5.25.

The stock then pared its gains to RM5.45 at the market close, still up 20 sen or 3.81%, for a market capitalisation of RM856.45 million. The counter has climbed 12.59% this year.