AMWAY (M) Holdings - 2Q12 Top Buy - 29 Mar 12

Stock Name: AMWAY
Company Name: AMWAY (M) HOLDINGS BHD

Research House: KENANGA

Price Call: BUY

Target Price: 10.94

AMWAY (M) is our top pick for 2Q12 for the consumerretailsector with an OUTPERFORM recommendation at a TP of RM10.94. AMWAY has been a consistently profitable company, withits sales having grown at a CAGR of 6.8% since the last ten years and its netprofit at a CAGR of 5.6%. In effect, AMWAY's bottom line has grown 11.5% perannum on average since 2009 and we expect it to continue to rise to 11.1% thisyear and a smaller 6.5% in FY13. The drivers would be the number ofdistributors growth rate (5.1% and 5.0% forecast in FY12 and FY13) and acontinued rise in its revenue per distributor driven by the rise in privatespending (our in-house economist is projecting a 6.8% rise in private spendingfor both FY12 and FY13). 

We believe AMWAY deserves a fair value of RM10.94, based on18x PER on its FY12 EPS of RM0.608 (a slight premium with the average MLM andnon-MLM retail related stocks and the current average FBMKLCI PER  of 16.0x). This premium we believe iswarranted due to the company's strong track record in growing its sales consistentlyand the resiliency of its business profitability. More importantly, thisoutperformance is set to continue, in our view. Our current fair value offers atotal upside of 19.4% for the stock (capital upside of 12.7% and dividend yieldof 6.7%), which is much higher than that of our projected FBMKLCI's 1 yearforward estimated total return of 6.3%. Our conviction is hence quite clear 'Buy AMWAY up to RM10.94 at market.

Estimated 11% marketshare. The company is one of the largest MLMbased companies in Malaysiawith an estimated market share of 11% locally and its sales products arepredominantly sourced from US, ranging from segments such as nutrition &wellness, skin care & cosmetics, personal care, home care and home tech. Consistentperformer. In addition, AMWAY has been a consistent performer in terms of itsshare price performance on Bursa Malaysia, where the stock recorded an averagetotal return of 8% p.a. among the top four performers on the local exchange inthe last 8 years.      

Clean balance sheet.AMWAY also has a clean balance sheet filled with cash (net cash of RM123m) andthe company's ROE and ROA of 44.6% and 28.7% are the highest among its peers. 

A potential gooddividend paymaster.  Amway Malaysiahas never incurred any borrowings since its listing. With low capex andadvertising cost, the company is able to grow its cash pile, which in turn isused by the company to principally reward its shareholders handsomely viadividends.  

Immediate plans goingforward.  Amway plans to introduce 9new products going forward of which 6 are from its beauty line, which generallymakes up around 50% of the company's sales. The group also intends to sourcemore products for the Malay market, which currently contributes only 20% of thegroup's sales. Other than that, the group is also looking at converting more ofits RDCs into 'AMWAY shops,' with two being converted last year while another3-4 more conversions are expected this year. We are positive on thesestrategies, which should further improve the company's earnings growthboth  for the short and long term.

Source: Kenanga