Amway: A One-off Earning Rebounce

Results Update

For QE31/13/2016, Amway's net profit increased by 255% q-o-q to RM18 million while turnover increased by 14% q-o-q to RM306 million. When compared to last year, net profit dropped by 51% while revenue slipped by 5%.

Revenue increased q-o-q mainly due to a pre-price increase buy up in  Q1 2016 and continued strong  momentum from the Group’s 40th Anniversary activities and incentives throughout 2016. Profit before tax increased by 164% q-o-q, due mainly to higher incentive provisions and other operating expenses in the preceding quarter.

Despite the positive spin, the y-o-y changes indicate that Amway is likely to have a weaker performance in FY2016 due to higher prices (as a result of stronger USD) and poorer consumer sentiment.


Table: Amway's last 8 quarterly results

From the Chart 1 below, we can see that profit margins are way below the historical level. As a result of this weaker performance, dividend payment has been slashed by as much as 50%.


Chart 1: Amway's P&L, Profit Margins & Dividend Payout last 35 quarterly results

Valuation

Amway (closed at RM9.20 yesterday) is trading at a trailing PER of 34 times (based on last 4 quarters' EPS of 27 sen). Dividend yield remains strong at 4.3%. If earnings continue to be weak, PER will rise and DY will drop further.  

Technical Outlook

Amway is still in a long-term uptrend line with support at RM8.00. Immediate support is not far from its current price; it will come from the horizontal line at RM9.00.

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Chart 2: Amway's monthly chart as at May 17, 2016 (Source: ShareInvestor.com)

Conclusion

Based on weaker financial performance and demanding valuation, Amway is rated a REDUCE for now. That rating will turn to SELL if the share price were to breach the uptrend line support at RM8.00.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Amway.