AmInvest Research Reports

Author: AmInvest   |   Latest post: Fri, 27 Nov 2020, 10:59 AM


Consumer Sector - Consumer spending to recover post-containment

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Investment Highlights

  • We maintain our OVERWEIGHT call on the consumer sector as we expect consumer spending to recover postcontainment of the Covid-19 pandemic. Our forecasts are based on the assumption that the outbreak will be contained within 1H2020. We believe consumer companies will be largely affected by the movement control order (MCO) that was recently implemented by the government 18–31 March. We expect consumers to reduce discretionary spending during the outbreak. We believe the recovery in spending will come in 2H2020 although at a slow pace as we expect the aftereffects of Covid-19 will take some time to dissipate. We have updated the valuation PE multiples for companies under our coverage to reflect the latest average 1-year forward PE as shown in Exhibit 1.
  • We believe the consumer company under our coverage that will be hardest hit by the Covid-19 pandemic and movement restriction is Berjaya Food (BFood) as its outlets can no longer serve dine-in customers for two weeks. As BFood’s Starbucks food items are considered discretionary products, we believe demand will be soft throughout the outbreak before picking back up post-containment in tandem with expected recovery in the economy.
  • BFood’s 2HFY20’s (Jan–Jun 2020) financial performance is expected to be soft on the back of the Covid-19 outbreak and MCO. However, we believe 3QFY20 will be slightly buoyed by stronger sales during the New Year holiday as well as Chinese New Year festivities. 4QFY20 is typically weak on the back of lower sales during the fasting month. We believe the outbreak would improve Starbucks and KRR’s delivery service sales. However, the impact is expected to be minimal as only around 1% of Starbucks and 10% of KRR sales are through delivery.
  • We also believe that the group will be hit by a weaker MYR against the USD as 50% of Starbucks’ cost of sales is denominated in USD. However, this will be mitigated by weaker commodity prices as shown in Exhibits 2–6. We have lowered our spend per outlet as well as store opening assumptions. We cut BFood’s earnings forecasts by 4–23% as shown in Exhibit 1. We downgrade our recommendation on BFood to a HOLD with FV of RM1.23.
  • Only World Group will be negatively impacted for the duration of the Covid-19 pandemic as it is heavily reliant on the tourism industry. Also, Resorts World Genting will be shut down for two weeks due to the MCO. We have lowered our average spend assumptions for OWG’s Genting and Komtar operations. We cut OWG’s FY20F earnings forecasts to account for a wider loss of RM3.6mil (vs. RM0.8mil previously) in FY20F. We slash OWG’s FY21F’s net profit by 62%. We maintain our HOLD call on OWG with an FV of RM0.21.
  • Padini will be negatively impacted as discretionary spending slows down and retail stores close for two weeks. The timing of Covid-19 is negative for Padini as 2H is typically the stronger half for the group. We believe the company’s Hari Raya festivities sale will be impacted by the outbreak. Padini is already seeing some delays for its 3Q2020 inventory due to shipment delays as its supply is mainly from China. We cut Padini’s FY20F to FY21F net profit by 1–27% to reflect poor consumer sentiment amidst the Covid-19 pandemic as well as its aftereffects. However, we upgrade our recommendation to a BUY for Padini with an FV of RM2.93 as its share price has tumbled 35% YTD.
  • MyNews’ store sales is expected to be weak due to loss of patronage during the two-week movement restriction although it will be slightly offset by delivery orders. We expect a slowdown in sales for 2QFY21F and 3QFY21F before recovering in 4QFY21F onwards. We cut our earnings forecasts by around 7–13% to account for less store openings assumption as well as lower assumption of spend per outlet by 20% in FY20F (from RM1.1mil per outlet to RM890K). We maintain our BUY call on Mynews with an FV of RM1.16.
  • We expect Power Root to be hit by the pandemic outbreak as consumer spending drops. We assume local sales to grow at a slower rate of 2% in FY21F and exports sales to grow at 5% (previously we expected a 10% growth) on the back of growth stemming mainly from expansion of new markets in non-GCC countries. However, we believe its performance will be slightly buoyed by cheaper raw material prices. We cut our earnings forecasts by 5–16%. We maintain our BUY call on Power Root with an FV of RM2.15.
  • Guan Chong’s order for FY20F was already filled up to 75% of capacity. However, we believe the outbreak will affect chocolate sales negatively as demand from tourists drop. We also expect some disruptions in chocolate manufacturing due to the Covid-19 impact. We have lowered our combined ratio assumptions for FY20F and FY21F. We have cut our earnings forecasts by around 1–5%. We maintain our BUY call with an FV of RM3.22.
  • We believe Leong Hup International (LHIB) and Nestle’s performances will remain stable. For LHIB, demand for poultry from fast-food chains might be slightly impacted by the movement restriction as dine-ins are banned for 2 weeks. However, as poultry remains a staple food item, we expect demand from households to grow, mitigating the impact. For Nestle, we believe there will be a short-term spike in sales for Nestle’s food items as panic buying ensues and consumers stock up their pantry in 1QFY20. However, we expect sales to taper down as consumers will have excess supply at home. Hence, we maintain our forecasts for LHIB and Nestle.
  • We may downgrade our forecasts further if the Covid-19 outbreak persists beyond 1H2020 and further dampens the economic growth in Malaysia as well as globally.

Source: AmInvest Research - 18 Mar 2020

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