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AMWAY’s 1QFY22 results came above expectations due to higher-than-expected demand for the group’s health and wellness products. We raise FY22E/FY23E earnings on account of improved margins as the group focuses on normalising expenses in FY22. Maintain call at MP but with a lower TP of RM5.30.

1QFY22 above expectation. 1QFY22 core PATAMI of RM20.2m came above our/consensus expectations (at 38%/37%) due to higher-than-expected demand for its health and wellness products. The group declared a dividend of 5.0 sen which came within expectation.

YoY, 1QFY22 revenue rose by 11% to RM391.2m thanks to strong demand for its health and wellness products due to product buy-up ahead of price increase, positive response to overall promotion and increase in buyer-base driven by higher AMWAY Privileged Customer (APC) count. Despite the rise in revenue, profit before tax (PBT) margin saw a drop of 7ppt as higher cost plus sales incentive resulted in PBT falling marginally by 0.3%. All in, the group’s core PATAMI grew marginally by 0.4% to RM20.2m.

QoQ, 1QFY22 revenue slipped by 0.3% due to the higher base in 4QFY21 on the launching of Atmosphere Mini and extended trade-in promotion for Sky (air purifier). However, this was mitigated by stronger demand for health and wellness products along with increased product buy-up ahead of price increase. As a results of higher pay-out for AMWAY Business Owners (ABO) and selling expenses in 4QFY21, the group’s PBT rose by >+100% to RM26.7m, with soaring PBT margin of 6.8% from 0.5% in 4QFY21.

Outlook. A turnaround in sign-up and renewal fees (7% YoY and 21% QoQ) was a surprise after two consecutive quarters of decline as we expected economic recovery to moderate growth in ABOs. The increase in ABOs is presumably due to the impact of the APC programme and sales incentive plans introduced in FY21. Moving forward, as the group focuses on normalising costs associated with ABO incentives and its awards, this will help to lower the pressure on margins and therefore, improve earnings. The effort in normalising expenses is evident with EBIT margin soaring to 6.9% from 0.5% in 4QFY21. However, we are cautious on the unfavourable USD/MYR forex rate which could add pressure to margins as majority of the group’s products are imported from its headquarters in United States.

Post results, we raise our FY22E/FY23E earnings by 13% each in line with improved margins.

MARKET PERFORM with a lower TP of RM5.30 (from RM5.65) pegged to FY22E PER of 15.3x implying 1.5SD below its 5-year mean. The lower PER is justified given its pre-pandemic PER trading range of c.18x when the USD/MYR forex rate started to turn unfavourable.

Risks to our call include: (i) lower-than-expected sales, and (ii) higher-than-expected import costs.

Source: Kenanga Research - 26 May 2022


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