Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 4 Dec 2020, 8:55 AM


Consumer - Finding Calm Within The Chaos

Author:   |    Publish date:

We reiterate our NEUTRAL rating on the consumer sector. While market sentiment has been hugely dented by the current Covid-19 outbreak with FBMKLCI plunging 18% YTD (as of our cut-off date at 20 March), we believe our F&B counters’ “safe haven status” shines even brighter now amidst these uncertain times, premised on their resiliency and relatively protected earnings in comparison to other sectors. Our F&B preferred picks would be PWROOT (OP; RM2.65) as we favour the name for its decent dividend yield of c.6% coupled with anticipation of a meaningfully stronger year driven by favourable sales and cost environment. We also like QL (OP; RM8.30) for its resilience and diversified earnings base which offers a growth trajectory of c.13-10%, as well as F&N (OP; RM35.20) for its booming Thai operations and below mean valuations of 24x PER which serves as an attractive entry point. Retailers, on the other hand, are poised for a recovery when the MCO is lifted from pent-up demand. Our sector top pick is PADINI (OP: RM2.40) for: (i) steady dividend yield of c.6% with net cash position, (ii) its resilient business model with growing e-commerce presence, and (iii) expectation of a recovery starting 2QCY20 on MCO pent-up demand and from the seasonal Hari Raya Aidilfitri sales.

Basic necessities. The local bourse stumbled into the year by registering a loss of 18% YTD (as of our cut-off date of 20 March), largely plagued by concerns over the prolonged Covid-19 outbreak, oil price rout and the sudden change in the local political landscape. While the consumer counters were not spared from the marketwide sell-down and trade disruptions, our F&B counters’ earnings are anticipated to remain relatively shielded compared to other sectors. This is premised on (i) their products’ resiliency being a basic human requirement, as well as (ii) the surge in demand arising from the pandemicspurred panic-buying and stocking on food necessities.

Opportunity to buy into 1QCY2020 weakness (for Retailers) to position for an anticipated better 2QCY2020. Retailers seasonally post lower sales in 1QCY due to a lower base compared to 4QCY which is boosted by seasonal year-end promotions and pre-CNY festivities. This current 1QCY20 is further hampered by lower footfalls from Covid-19 outbreak and one-month movement control order (MCO). We believe that investors could use this opportunity to buy into 1QCY weakness (for Retailers) as we are expecting better growth starting 2QCY20 (assuming no extension on MCO) from Hari Raya Aidilfitri, subsequent pent-up demand from the MCO and maiden benefits from the distribution of government stimulus package 2020. However, in the event of the global coronavirus outbreak and domestic political turmoil taking more than the next few months to resolve, it would further affect the retail consumption pattern in Malaysia drastically. This will lead to Malaysia retail industry suffering from negative growth rate for the entire year. The last time when the Malaysian retail industry recorded a negative growth rate was during the 1997-98 Asian Financial Crisis. In 1998, the market size of the Malaysian retail industry contracted by 20%.

2020 Economic Stimulus to cushion the negative impact. Furthermore, the 2020 economic stimulus package and the recent additional stimulus package (announced periodically by the Prime Minister) announced by the government is a boon to the retail sector aim to re-invigorate local demand amidst the current crisis. The stimulus package will have three main thrusts: (i) mitigating impact of Covid-19, (ii) spurring people-centric economic growth, and (iii) encouraging quality investments in the country. In terms of the measures we think as having a significant positive impact to the market is the measure to boost consumption growth via a (i) voluntary 4% reduction in employees’ minimum EPF contribution from 11% to 7% from 1 Apr – 31 Dec 2020, (ii) i-Lestari withdrawal facility from EPF account 2 (maximum amount of RM500 monthly for a period of 12 months), (iii) workers forced to take unpaid leave to receive cash assistance of RM600 a month up to 6 months, and (iv) temporary deferment or suspension of loan/financing repayment obligation (principal and interest) for a limited period of time (up to 6 months for now). Not only that, the Bantuan Sara Hidup (BSH) recipients’ RM200 entitlement payment will be brought forward from May to March in addition to an extra RM150 that will be paid in May of which RM50 will be in e-tunai. There will be other measures announced periodically by the Prime Minister after the discussion with the affected parties during this outbreak.

Maintain NEUTRAL on consumer sector. Our sector top pick is PADINI (OP: RM2.40) for: (i) steady dividend yield of c.6% with net cash position, (ii) its resilient business model, focusing on the value-for-money segment through its Brands Outlet stores, with growing e-commerce presence, and (iii) expectation of a recovery starting 2QCY20 (if no extension on MCO) on MCO pent-up demand and from the seasonal Hari Raya Aidilfitri sales. For most of other retailers under our coverage, we maintain our call, but revise TP to reflect the lowest valuation possible (Please refer to Valuation & Justification For Calls Table at Page 4&5 for more info) and expect a better 2HCY20 on recovering consumer sentiment. Our F&B counters are expected to remain as “safe havens” for investors who prefer stocks offering stability and resiliency with intact fundamentals, especially in times of uncertainty like this. However, we note that a lacklustre domestic currency and near-term volatility from the Covid-19 outbreak may put some pressure on profitability. Within our

F&B stock coverage, we favor (i) PWROOT (OP; TP: RM2.65) for its decent dividend yield of c.6% coupled with expectation of a meaningfully stronger year driven by more favourable sales and cost environment, (ii) QL (OP; TP: RM8.30) for its resilient and diversified earnings streams which offers a rosy growth trajectory of c.13-10%, in comparison to other large cap F&Bs with earnings growth of c.8% on average, (iii) as well as F&N (OP; RM35.20) for its robust regional exposure coupled with below mean valuations of 24x PER which serves as an attractive entry point.

Maintain OVERWEIGHT on Sin Sector. With the recent market-wide sell-down pricing in most of the negatives, we believe values have emerged in our Sin counters. We have upgraded both our breweries - CARLSBG (OP; RM25.65) and HEIM (OP; RM26.05)

to OUTPERFORM as we are positive on the breweries’ long-term prospects and attractive dividend yield of c.5%. Nonetheless, we are revising both their target prices downwards to account for any near-term risks that may prevail in the case of a prolonged Covid- 19 outbreak and/ or a possible excise duty hike. (Please refer to Valuation & Justification For Calls table at Page 7 for more info). For BAT (OP: RM15.50), we are maintaining our call with a lower TP of RM15.50 (from RM16.70) on a lower applied PER of 13.0x (implies -1.5SD over 3-year mean PER). Despite the group’s outlook being consistently threatened by illicit tobacco issue, we believe value has emerged as: (i) the stock is now trading at a compelling 8.0x PER, below its 10-year historical low, coupled with (ii) an attractive dividend yield of c.11% offering some degree of defense under the current market uncertainty.

Consumer sentiment to remain soft. The Malaysian Institute of Economic Research’s (MIER) posted 82.3 points (-1.7ppt QoQ, - 14.5ppt YoY) for its 4QCY19 Consumer Sentiment Index (CSI). We believe the QoQ weakness is largely owed to the increasingly cautious spending patterns observed from the consumers, which leans more towards value-for-money purchases instead of highvalue discretionary spending such as vehicles, imported goods and overseas travels. That said, we are expecting consumer sentiment to remain soft for the upcoming quarters, as heightening Covid-19 cases recorded within Malaysia and the imposed movement restriction are likely to dent consumers confidence, which would consequently disrupts the retail industry.

KLCSU underperformed KLCI by 8%. After weathering through a series of trade war induced market volatility for most of 2019, our local market has entered 2020 by plunging deep into the negative region. This is against the backdrop of uncertainties surrounding a possible pandemic-fuelled recession, oil price crash as well as local political turnmoil. As of our cut-off date, the KLSCU has declined by 26% YTD which was behind of our local bourse’s decline of 18%. Among the members of KLCSU that are within our consumer coverage, PPB, BAT and NESTLE were the key laggards, likely due to the exit of foreign funds out of these relatively illiquid names in light of the macro-economic headwinds.

Source: Kenanga Research - 2 Apr 2020

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