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PP 7767/09/2010(025354)

Malaysia Corporate Highlights RHB Research

Institute Sdn Bhd
A member of the
RHB Banking Group
R e su l ts N o t e Company No: 233327 -M

25 February 2010

Amway (M) Holdings Share Price

Fair Value
Look Forward To 2010 Recom : Outperform

Table 1 : Investment Statistics (AMWAY; Code: 6351) Bloomberg: AMW MK

Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/NTA Gearing ROE NDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (%) (%) (%)
2009a 663.0 72.5 44.1 -23.7 16.7 - 5.1 Net cash 30.7 6.5
2010f 697.9 89.6 54.5 23.6 13.6 55.0 5.0 Net cash 37.1 6.8
2011f 722.5 92.8 56.5 3.5 13.1 59.0 4.8 Net cash 37.3 7.0
2012f 748.0 96.1 58.4 3.5 12.6 - 4.7 Net cash 37.5 7.3
Main Market Listing / Trustee Stock / Syariah Approved Stock By The SC * Consensus Based On IBES Estimates

♦ Below expectations. Amway’s FY12/09 net profit of RM72.5m was below RHBRI Vs. Consensus
our but in line with consensus expectations, accounting for 88% and 95% of Above
our and consensus forecasts respectively. However, Amway’s gross profit In Line
level was in line with our expectations (accounting for 99%). The key Below
variances were mainly due to higher-than-expected distribution cost and
selling and administrative expenses in 4Q09, which we believe was Issued Capital (m shares) 164.4
attributable to the opening of the new headquarters. Qoq, distribution cost Market Cap(RMm) 1209.9
and selling and administrative expenses jumped by 21% and 14% Daily Trading Vol (m shs) 0.04
respectively. Meanwhile, effective tax rate remains high at 26.6%, due to 52wk Price Range (RM) 6.60-7.40
certain expenses being disallowed for tax purposes. During the quarter, Major Shareholders: (%)

Amway declared a final single-tier dividend of 7 sen, bringing full year FY09 Amway Global 51.7
net dividend to 48 sen or net dividend payout of 109%, which is in line with Skim Amanah Saham 16.9
our forecast of 48 sen, translating to net yield of 6.5%. EPF 5.7

♦ Higher cost and unfavourable exchange rate. Unfavourable exchange

EPS chg (%)
FYE Dec FY10
rate movements coupled with higher distribution cost and selling and
Var to Cons (%) (0.9) (4.3) 0.0
administrative expenses led to Amway’s net profit drop of 23.7% yoy despite
a 2.9% increase in turnover. In FY09, Amway’s imported purchases (which PE Band Chart
make up of c.88% of costs) were acquired at an average US$ against RM of
RM3.60/US$ vs. RM3.40/US$ in FY08. For every 1% appreciation in US$
PER = 20x
against RM, this would lead to a 0.2-0.4%-pt loss in gross profit margin for PER = 16x
Amway. PER = 12x

♦ Better outlook ahead. We expect Amway’s outlook to remain favourable

given: 1) improving consumer sentiment from better economic outlook; 2)
weaker US$ against ringgit; and 3) Amway’s growth plans through higher
compensation scheme for distributors, new product offerings, increase in
pricing and more aggressive A&P activities. We remain confident in Amway’s Relative Performance To FBM KLCI
ability to continue paying its attractive dividend.

♦ Forecasts. We reduced our FY10-11 forecasts by 2.9-3.3% after adjusting FBM KLCI
for FY09 results. We have introduced our FY12 forecasts with the following
assumptions: 1) 2% growth in CDF yoy; 2) 1.5% growth in turnover per
distributor given its more saturated market position; and 3) exchange rate
assumption of RM3.30/US$. Amway

♦ Risks. The risks include: 1) decline in consumer spending power; and 2)

intensifying competition.
Hoe Lee Leng
♦ Investment case. We expect Amway to continue its net dividend payout of
(603) 92802239
90-95%, translating to a respectable net dividend yield of c.7% for FY10-12.
Our DCF-derived fair value is reduced to RM8.45 (from RM8.50) using an
unchanged WACC of 8.1%. Maintain our Outperform recommendation on
the stock.

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25 February 2010

Table 2. Earnings Review (YoY)

FYE Dec 2008 2009 2009 %QoQ % YoY 2008 2009 % YoY Comments
(RMm) 4Q 3Q 4Q Chg Chg FY FY Chg
Revenue 171.8 174.9 171.9 (1.7) 0.0 645.5 663.9 2.9 The increase was underpinned by
higher distributor productivity
driven by enhanced sales and
marketing programmes
implemented; together with 5%
increase in ASP of selected
product lines in Nov 08 (or
+1.9% on an absolute basis).

EBIT 28.1 27.2 21.3 (21.7) (24.2) 120.9 94.2 (22.1) Due to lower EBIT margin.

Finance income 2.2 1.1 1.0 (8.8) (52.9) 8.3 4.7 (43.6) Lower net cash by RM63.9m yoy.

PBT 30.3 28.3 22.3 (21.2) (26.3) 129.2 98.9 (23.5)

Taxation (8.4) (7.9) (6.0) (24.3) (29.1) (34.2) (26.3) (22.9)
Net profit 21.9 20.5 16.4 (20.0) (25.2) 95.1 72.5 (23.7) Filtered down from PBT.
EPS (sen) 13.3 12.5 10.0 (20.1) (25.2) 57.9 44.1 (23.7)
Net dividend (sen) 7.0 27.0 7.0 (74.1) 0.0 41.8 48.0 14.9 Amway declared a fourth interim
single-tier dividend of 7 sen in

EBIT margin (%) 16.4 15.6 12.4 (3.2) (4.0) 18.7 14.2 (4.5) Lower EBIT margin due to
stronger US$ against RM, higher
A&P expenses and higher
investment in consumer access
driven strategies.

PBT margin (%) 17.6 16.2 13.0 (3.2) (4.6) 20.0 14.9 (5.1)
Net profit margin 12.7 11.7 9.5 (2.2) (3.2) 14.7 10.9 (3.8)
Effective tax rate 27.7 27.7 26.7 (1.1) (1.1) 26.4 26.6 0.2 Higher than statutory tax rate
(%) due to certain expenses being
disallowed for tax purposes.

Source: Company, RHBRI

Table 3. Earnings Forecasts Table 4. Forecast Assumptions

FYE Dec (RMm) FY09a FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F

Turnover 663.0 697.9 722.5 748.0 Increase in CDF (ooo) 4 4 4

Turnover growth (%) 2.7 5.3 3.5 3.5 Growth in distributor productivity (%) 2 2 2

Cost of Sales (471.5) (477.3) (494.0) (511.3)

Gross Profit 192.4 220.6 228.5 236.8

EBITDA 105.8 122.1 126.4 130.9

EBITDA margin (%) 16.0 17.5 17.5 17.5

Depr&Amor (2.5) (5.1) (5.4) (5.7)

Net Interest 4.7 3.5 2.6 4.2

Pretax Profit 98.9 122.1 126.4 130.9

Tax (26.3) (32.5) (33.6) (34.8)
Net Profit 72.5 89.6 92.8 96.1
Source: Company data, RHBRI estimates

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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securities, subject to the duties of confidentiality, will be made available upon request.

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