Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Wed, 12 May 2021, 9:00 AM


Consumer - Happy Cautious New Year

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We reiterate our NEUTRAL rating on the consumer sector due to the lack of near-term re-rating catalysts. Basic consumption should persist to be buoyed by government stimulus packages, a low interest rate environment and consumer-friendly Budget 2021. That said, the cautious consumer sentiment remains moving past the new year, no thanks to the lingering impact of the Covid-19 outbreak. A major deciding factor to recovery lies in a successful and effective Covid-19 vaccination program which we see materialising as the year progresses. F&B counters, especially those with higher exposure to in-home consumption (i.e. QL, NESTLE and PWROOT) should remain fairly resilient and would still fare better than others in the event of a prolonged fight against the pandemic. We stay selective on the sector as most counters’ valuations remain elevated; favourite picks are (i) CARLSBG (OP; RM26.50) as a recovery play premised on the recent Covid-19 vaccine developments, which could see a comeback of inelastic beer demand and generous dividend pay-out in FY21, as well as (ii) PWROOT (OP; RM2.25) as a resilient dividend play amid the low interest rate environment – offering dividend yield of c.5-6%.

Staying hopeful. We believe the cautious consumer sentiment will persist moving into the early part of 2021, coupled with the anticipation for a gradual demand recovery for both value-for-money staples as well as high-value discretionary products in the event of eventual containment of Covid-19. Though the recovery in consumer sentiment in the near-term may be stalled by concerns of resurgence of Covid-19 cases locally, as well as the lingering impacts of Covid-19 prevention measures (i.e. lower operating hours and capacity in compliance with required SOP, certain industries are still prohibited from operating, etc), basic consumption should still continue to be supported by: (i) the government’s stimulus packages of an unprecedented scale, (ii) a low interest rate environment, and (iii) a consumer-friendly Budget 2021 which should provide some additional financial relief.

Better days are coming. The worst of the pandemic-hit year should be behind us now, with 2QCY20 bearing the largest impact of the most stringent movement control order (MCO). Henceforth, we believe our consumer counters should be able to see a better year ahead, banking on anticipation of a successful containment of local Covid-19 cases, which would eventually result in: (i) normalization of earnings for the F&B’s HoReCa channels, (ii) return of retail footfall to the malls and stand-alone retail stores, as well as (iii) the revival of the local tourism scene as interstate travels restrictions have been lifted. Noting that the largest deciding factor for recovery comes down to the successful deployment of Covid-19 vaccine, we believe that the F&B counters, especially those with higher exposure to in-home consumption (i.e. QL, NESTLE and PWROOT) should remain fairly resilient and would still fare better than others in the event of a prolonged fight against the pandemic. Notably, in an attempt to adapt to the changing consumer patterns, majority of companies are ramping up their online presence – mostly through 3 rd party e-commerce platforms, aiming to capture additional market share from consumers favoring online shopping over brick-and-mortar stores.

Maintain NEUTRAL on consumer sector due to the lack of near-term rerating catalysts. Downside risks should be relatively limited as basic consumption remains buoyed by stimulus measures and most of the counters within our coverage possess the required balance sheet strength to tide over the ongoing crisis. With the valuations for majority of our stocks remaining elevated, our sector preferred pick would be PWROOT (OP; TP: RM2.25) as we like the stock for being a resilient dividend play, backed by: (i) relatively inelastic coffee demand, (ii) attractive dividend yield of c.5%, as well as (iii) controlled margins from the group’s continuous business transformation plan to achieve greater cost efficiency by driving rationalisation exercises for its distributorships, sales force and factory operations.

Sin sub-sector downgraded to NEUTRAL. Following the recent share prices rally, we closed our BUY calls on HEIM (MP; TP: RM23.55) and BAT (UP; TP: RM11.05) as the positives may have been more than priced in at this juncture, in our view. Despite the Budget 2021 being a positive one for our tobacco coverage BAT with more stringent measures imposed to curb rampant contraband cigarettes, we believe the key matter lies in execution and any meaningful earnings recovery for the stock would only materialise with a sustained clampdown on the illegal trade. Hence, it is our view that BAT should continue to struggle with the illicit tobacco issue, which may be further exacerbated by the weaker purchasing power caused by a disrupted economy, at least in the near-term. Meanwhile, we note that the operating landscape for the breweries still remains challenged by uncertainties brought by the global pandemic (i.e. continued closure of a number of the on-trade channels, lower capacity and operating hours for eateries). That said, we believe that investors should look beyond the near-term weakness, and instead focus on the prospect of earnings recovery which is looking much brighter given recent vaccine developments, which could see a comeback of inelastic beer demand and generous dividend pay-out in FY21. With that, our sub-sector top pick is CARLSBG (OP; TP: RM 26.50), as any near-term weakness in its Malaysian operations would be mitigated by a studier Singapore operation due to the latter’s improving pandemic situation.

KLCSU lags behind KLCI by 11%. Against the backdrop of uncertainties surrounding a pandemic-fuelled recession, an oil price crash as well as local political turmoil, our local market entered 2020 plunging deep into the negative region. This was followed by a “V-shaped” recovery in stock prices from March, which saw both FBMKLCI and the KL Consumer Index (KLCSU) rebounding sharply to erase nearly all of the earlier losses. As of our cut-off date, the KLSCU has declined by 8% YTD which is behind of our local bourse’s gain of 3%. Among the components of KLCSU that are in our consumer coverage, NESTLE, CARLSBG and HEIM were the key laggards, likely due to: (i) the exit of foreign funds from the rather illiquid NESTLE in light of the macro-economic headwinds, as well as (ii) the flight of funds from the Sin counters in anticipation of potentially weaker earnings and lower dividend pay-out amid the raging pandemic.

Consumer sentiment still holding up. The Malaysian Institue of Econonic Research (MIER) posted 91.5 points (+2% QoQ, +9% YoY) for its 3QCY20 Consumer Sentiment Index (CSI). It is a relieving to see that the consumer confidence remains rather steady in spite of the worsening pandemic situation locally, as the continual improvements in business environment and labour market continue to buoy confidence. That being said, given that the economic disruptions brought by the pandemic may still take several quarters to return to pre-Covid levels and with the CSI remaining below optimism threshold, we believe that consumer spending patterns are likely to remain vigilant and prudent, with more focus being placed on value-for-money staple products.

Upticks in commodity prices, with weaker MYR, YoY. Recent months’ readings have seen upticks in major commodities prices. The steady uptrend in global dairy prices is primarily supported by sturdy demand from Asian markets (i.e. China) which have kept the current global pandemic under control, as well as lower inventories over at European and U.S. Meanwhile, the higher coffee bean prices are likely driven by the unfavourable weather conditions in both Vietnam and Brazil. Our local currency, on the other hand, has been showing weakness lately on the back of a weaker Brent crude oil prices amid the resurgence of Covid-19. Overall, while the combination of a depreciated MYR and upticks in commodity prices do not bode well for the F&B counters’ profitability, we believe they could only exert muted impacts in the near-term, given that most companies have their respective hedging practices in place.

A mixed bag with a negative bias. Nearly half of our 13 stocks coverage (AEON, DLADY, MYNEWS, PWROOT, CARLSBG, HEIM) came in below expectations for the latest results season. Most of these negative surprises can be attributed to worsethan-expected Covid-19 disruptions to the retail footfall and HoReCa channels, which had left a drastic impact on profitability. Conversely, AMWAY and SEM beat expectations on the force of stronger-than-expected demand for health products amid the pandemic, while the positive surprise from BAT can be attributable to stronger-than-expected top-line growth, thanks to steady Dunhill sales coupled with its Value for Money (VFM) segment charting good progress. The remaining four fairly resilient names (F&N, NESTLE, PADINI and QL) all reported satisfactory results.

Source: Kenanga Research - 6 Jan 2021

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