Target Price: MYR11.75
Bitten By Higher Operating Costs
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%.
Publish date: 02/09/13