AMWAY (M) Holdings - Lowered our dividend forecasts

We recently attended Amway’s 2Q12 results briefing and came back with our conviction strengthened that the company will continue to optimise returns to its shareholders with its sustainable high ROE of about 50%. Despite all types of headwinds, the company has been able to maintain its high dividend distributions over the years. Nevertheless, due to distributable reserves restriction, we are revising down our FY12-13E net dividend per share estimates from 70sen for both FY12-13E to 57.9-62sen. These, however, still work out to attractive net dividend yields of 5.3-5.7% for FY12-13E. Our earnings estimates are maintained for the company. Given the decent potential total return of 12.9%, we reiterate our OUTPERFORM call on Amway with an unchanged TP of RM11.68 based on 18.0x PER over its FY13 EPS of RM0.647.

To recap, the 1H12 revenue improved by 7.6% YoY on the back of higher demand for its products driven by the successful implementation of various products promotions and an increase in the number of the core distributor force. Meanwhile, management also emphasised that the 1H12 performance was exceptionally good as the NP increased a strong 17.4% despite it being a seasonally lower period (compared to the 2H). The better performance was mainly attributable to the increase in selling prices, lower product costs as well as a favourable forex exchange rate.

Slight variance as compared to internal projection. Following the exceptionally well performance in 1H12, management  re-emphasised that the 2H12 profitability would be tougher than 1H12,  and is thus projecting only a single-digit growth rate for the whole year. Based on our earnings estimates for FY12, we are expecting RM53.0m for 2H12, which implies only a 4.6% YoY growth from 2H11. Hence, we believe our 11.1% YoY growth rate for FY12 NP is still in line with management’s view and should be achievable. Thus, we are maintaining our earnings estimates of RM100.0m and RM106.4m for FY12-13E, which will be mainly supported by a higher distributor productivity driven by an aggressive sales and marketing program.   

Revising dividend forecast. Due to its limited distributive reserves, we reckon that the company would now be able to distribute only a 57.9 sen dividend per share for FY12, which is somehow in line with the management’s guidance that the full-year distribution would not exceed last year’s payout of 66sen. Thus, we are revising our earlier dividend forecasts lower from 70 sen for both FY12-13 to 57.9-62sen. These, however, still work out to attractive net dividend yields of 5.3-5.7% for FY12-13E.

Valuation. Given the uncertainty of the prevailing economic conditions, the trend towards overweighting defensive stocks by investors remains firm. With Amway’s attractive net dividend yield of 5.7%, this should keep the stock within the investors’ radar. We are maintaining Amway’s TP of RM11.65 based on a PER of 18.0x forward PER over its FY13 EPS of RM0.647. This PER is the +2SD valuation above the 5-year average PER (note that the stock is currently trading at close  to a +2SD PER level over its FY12 earnings).    

Source: Kenanga