Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 21 Feb 2020, 9:48 AM


Consumer - It’s Safe Here

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We reiterate our NEUTRAL rating on the consumer sector. 2020 could be a better year for consumer sentiment, with the help of: (i) a consumer-friendly Budget 2020 with various increased allocations of subsidies and social assistances, (ii) stable job market outlook, coupled with (iii) the launch of Visit Malaysia 2020 to spur tourists’ spending. Weaker MYR and upticks in commodities prices could nonetheless put some cost pressure on local manufacturers. Despite challenges in 2019, consumer stocks have performed better than the benchmark FBMKLCI index, which we expect to persist moving into the new year thanks to their defensive nature. For our sector top pick, we like PADINI (OP:RM4.00) for its resilient business model and expecting stronger upcoming quarters buoyed by year-end sales and festivities. Our other stock pick would be PWROOT (OP; RM2.75) as we favour it on expectations of a meaningfully stronger year buoyed by more favourable sales and cost environment.

Safe & Sound. Moving forward, we anticipate our coverage consumer counters to remain resilient in the face of macroenomic headwinds, mainly premised on: (i) resilient demand for consumer staples, as the majority of our coverages appear to be largely immuned to the passive governement policies (i.e. SST and sugar tax), (ii) healthy employment market outlook, coupled with (iii) a consumer-friendly Budget 2020 with a series of increased allocations of subsidies and social assistances. Several sporting events (i.e. Euro 2020 and Tokyo Summer Olympics) in 2020 could also help boost some impulse spendings.

Visit Malaysia 2020 goodies. 2020 could be a better year for F&B players and Retailers with the launch of Visit Malaysia 2020. The Tourism, Arts and Culture Ministry is working towards achieving a target of 30m tourist arrivals that will generate around RM100b in income under the Visit Malaysia 2020 campaign. Note that, Malaysia has already registered 20.1m visitor arrivals in 9MCY19 (+3.7% YoY). The top 10 source markets for arrivals were Singapore (7.9m), Indonesia (2.8m), China (2.4m), Thailand (1.4m), Brunei (0.9m), India (0.5m), South Korea (0.5m), the Philippines (0.3m), Vietnam (0.3m) and Japan (0.3m). Government has allocated RM1b through the Tourism Infrastructure Fund, which is available up to 31st Dec, 2020 or until depletion. The fund is available to all tourism infrastructure projects such as projects that contribute to the development of the tourism industry and not just limited to hotel, convention centre, facilities related to education, medical or agro-tourism. Retailers could tap into the fund to build around their existing infrastructure to cater for tourism activities, which may increase footfalls into their stores/malls.

Opportunity to buy into 3QCY weakness (for Retailers) to position for a better 4QCY and Visit Malaysia 2020. Retailers fared the worst in 3QCY19 due to the absence of festivities that typically spur consumer spending. We believe that investors could use this opportunity to buy into 3QCY weakness (for Retailers) as we are expecting better growth in 4QCY19 from yearend and Christmas festive season sales, as well as the upcoming Visit Malaysia 2020 (refer to AEON and PADINI’s quarterly net profits vs. share prices table). This is in line with RGM’s targeted sales growth for 4QCY19 at 3.8%, which is close to the whole year targeted sales growth of 3.7%, as well as higher than 3QCY19 actual sales growth of 1.8%. On-going PH government measures to lessen the financial burden of B40 group such as the Bantuan Sara Hidup (BSH), minimum wages, targeted fuel subsidies (effective CY20) and several others measures announced in Budget 2020 are expected to continue supporting consumer spending on basic necessity items, which in turn will benefit affordable apparel retailers (PADINI) and supermarket/department stores operator (AEON).

Maintain NEUTRAL on consumer sector. Our F&B counters are expected to remain as “safe haven” for investors who prefer stocks offering stability and resiliency with intact fundamentals. However, we note that a lacklustre domestic currency and upticks in commodity price trends could put some pressure on profitability. We also take the chance to re-look at some counters; we are keeping our MARKET PERFORM call on DLADY (MP; TP: RM49.30) but cut its TP to RM49.30 (from RM54.60) after applying a lower PER of 28x (from 31x PER) which is closely in-line with its -1.5SD due to the lack of earnings visibility for this counter, no thanks to: (i) poorer product mix, coupled with (ii) unfavourable fluctuations in forex which looks to offset the downticks in dairy prices. While Retailers with high import content may see a dampening impact from sales taxes, as well as weaker forex exposure against CY18, gradual sales price re-structuring exercise could potentially offset the higher tax component in their respective pricing models. With our view that investors should take opportunity to buy into 3Q weakness (for Retailers) to position for a better 4Q and Visit Malaysia 2020, we upgrade AEON to OP from MP with unchanged TP of RM1.60 (based on unchanged 21x FY20E EPS, at -1.0SD of its 5-year historical mean PER). Nevertheless, for MYNEWS and PARKSON, we see limited upside as both are still in gestation period for their respective plans; expansion of latest products for MYNEWS and stores restructuring activites for PARKSON. Thus, we cut MYNEWSTP to RM1.10 based on revised 25x FY20E EPS, at -1.5SD of its 3-years historical mean PER (from RM1.20 based on 27x FY20 EPS, at -1.0SD) and revised PARKSON’s SoP derived TP to RM0.220 (from RM0.270), while keeping both at MP.

Source: Kenanga Research - 3 Jan 2020

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