AMWAY: Earning Still Weak

Results Update

For QE31/3/2017, Amway's net profit dropped 18% q-o-q or 48% y-o-y to RM9.5 million while revenue dropped 6% q-o-q or 22% y-o-y to RM237 million. Revenue decreased by 5.5% q-o-q due to further consolidation following the conclusion of ABOs’ Performance Year 2016, which was driven by strong ABO momentum towards the 40th anniversary programs. Profit before tax decreased by 8.8% q-o-q mainly due to lower sales and higher import costs. These were partly offset by lower provisions for sales incentives and ABO incentive trips, as well as reduced operating expenses. (Amway's latest result was announced May 17.)

Table: Amway's last 8 quarterly results


Graph: Amway's last 39 quarterly results

A significant portion of Amway's products and/or inputs are sensitive to the movement of USD-MYR. Since the movement has been unfavorable for the past 2 years, this has affected Amway's revenue & profits. From the chart below, we can see that USD-MYR is at a crossroad. Any further weakness in USD could cause the uptrend of USD-MYR to reverse and that will bring about a favorable change in the pricing of its products, leading to improved sales & profitability. 


Chart 1: USD-MYR's weekly chart as at June 2, 2017 (Source: Investing.com) 

Valuation

Amway (closed at RM7.60 last Friday) is trading at a trailing PER of 27 times (based on last 4 quarters' EPS of 28 sen). While PER appears elevated, this may change with better performance if USD-MYR reverses. Meanwhile, investors may take comfort in receiving a decent dividend yield of 3.9%.

Technical Outlook

Amwayhas tested its long-term uptrend line at RM7.50. Further price run-up could trigger the MACD to hook-up. This may be the positive signal that shareholders are waiting for.


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

Good entry to this stock is at RM7.30-7.50. An upside breakout of the horizontal resistance at RM8.20 could signal the next upleg for the stock.



Chart 3: Amway's daily chart as at June 2, 2016 (Source: ShareInvestor.com)

Conclusion

Despite the weaker financial performance and demanding valuation, Amway could be a good stock to consider for recovery play. For reason stated above, I revised my rating from REDUCE to ACCUMULATE.

Note:
I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.