AMWAY gains on rising domestic spending

Direct selling company, Amway (M) Holdings (RM8), is enjoying better earnings on the back of rising domestic consumption as well as the stronger ringgit.

The company’s sales continued to improve in the latest quarter, rising 9.8% year-on-year (y-o-y) to RM168.3 million, on the heels of the 7.1% y-o-y increase in 1Q10. For the first half of the year, sales were up 8.4% y-o-y to RM343.8 million.

While sales in the first three months of the year were boosted by pre-price-increase buying, sales in 2Q10 were boosted by the price increase, which averaged an estimated 4% effective March 2010, as well as improved distributor productivity.

Diversified sales base lower risks
We expect Amway to continue to fare well in 2H10. Domestic consumption is still fairly robust despite some inflationary pressure. Consumer confidence and the employment market are expected to stay resilient even though there are uncertainties as to the pace of the global economic growth. Indeed, while growth is expected to slow, few are predicting a fallback into recession.

Plus, Amway’s sales are well diversified. Its distributor base of 208,000, as of end-2009, caters to a broad cross-section of consumers. The company also carries a wide range of consumer goods, including personal care, nutrition and wellness, skin care, home tech and home care products, totaling over 250. Six new products were introduced in 2009 and another seven are planned for the current year.

Ringgit strength boosts margins
The company’s profitability improved in 2Q10, helped, in part, by the strengthening local currency. Given that the bulk of its products are imported in US dollar, a stronger ringgit will translate into lower cost of goods. The ringgit is expected to sustain its strength, at least in the near to medium term, with the US recovery still sluggish.

On the other hand, we could see some negative impact on margins from the increase in the price for purchases from Amway’s US-based parent company.

Prices were revised upwards by a weighted average of about 2% in May 2010. On balance though, we still expect improved margins in 2010 compared to the previous year.

Net profit is estimated to grow to roughly RM83.4 million this year or 50.7 sen per share.

That prices its stock at some 15.8 times forward earnings, which is fairly consistent with the average valuations for high-yielding consumer stocks.

Higher earnings this year raise chances for better dividends
Amway upped its quarterly payout to 9 sen per share, net, in 1Q-2Q10. We estimate dividends for the full year to total some 52-56 sen per share, which will give shareholders attractive net yields of 6.5%-7% at the current share price — among the highest for dividend stocks on the local bourse.

With the bulk of the capital spending for its new headquarters — which includes a larger processing centre, warehouse and advanced system that can process up to three times the number of orders daily as well as training and brand centres — already paid for, future capex requirements will fall.

Including the cost of setting up three new retail outlets, capex is estimated at roughly RM15 million this year and should fall further in 2011. With net cash in hand of RM188.6 million, Amway can afford to boost its dividends.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.


This article appeared in The Edge Financial Daily, September 1, 2010.