HLBank Research Highlights

Author: HLInvest   |   Latest post: Fri, 18 Jan 2019, 09:46 AM


Consumer - Expensive Valuations Remain

Author:   |    Publish date:

We expect increased sales of consumer staple products from cash handouts to be cancelled out by higher commodity prices in 2019. While the newly elected Government have announced their intention to crackdown on illicit cigarette and alcohol trade, there are significant hurdles to achieve this. We maintain our HOLD call on the sector given the relatively expensive valuations, particularly amongst large cap stocks. Top picks: Hup Seng Industries (BUY; TP: RM1.38), Carlsberg (BUY; TP: RM22.70).

Cash handouts, higher minimum wage expected to spur consumption. BSH cash grants, bonus payments to civil servants, fuel subsidies, SPR i-Suri contribution scheme and electricity subsidies (for houses with monthly utility bills under RM20) amounting to RM9.2bn should spur consumption in 2019 (figure 1). Despite this, we note that this is lower than the cash handouts totalling RM12.7bn for 2018. Nevertheless, the hike in minimum wage to RM1,100 should result in increased consumption given lower income earner’s higher marginal propensity to consume.

Higher key commodity prices expected in 2019. Many FMCG (Nestle, Hup Seng Industries) and F&B player’s (Bfood) profitability are tied to commodity prices. 2018 saw significantly cheaper commodity prices in key commodities vs 2017 (YoY: Arabica: -15.1%, Robusta: -16.2%, CPO: -14.3%, Sugar, -22.5%) (figures 2-8). In 2019, we expect consumer companies to suffer from higher commodity costs. Unfavourable weather conditions in key markets are expected to result in supply shortages, resulting in more expensive coffee bean and cocoa prices (Focus Economics). However, going into 2019, HLIB expect CPO price to remain relatively unchanged at RM2,300/MT from an average of RM2,318/MT in 2018. Furthermore, sugar prices are expected to remain stable due to declining demand in USA, UK, Australia and China as consumers in these mature markets opt for healthier alternatives (Focus Economics).

Clamping down on the illicit market to rerate the sin sector? In the Budget 2019 announcement, the Government reiterated their desire to clamp down on the illicit tobacco and alcohol trade. In the recent budget, the Finance Minister announced that they hope to collect at least RM1bn in lost tax revenue from the rampant illicit tobacco trade. Based on our estimates, RM1bn represents 13% of the total tobacco market. Achieving this target would lower illicit trade to 49% of the total market share from 62% currently. Despite this, we are reticent to account for any significantly lower illicit market share as we understand there are significant hurdles to be overcome.

Valuations remain expensive. Since early 2018, valuations for large cap consumer companies under out coverage have rerated upwards, which has prevailed for the remainder of the year (figure 9&10). Currently, the largest consumer companies by market capitalisation are trading at around +2SD above their five year average PE multiples. As such, the possibility of a downward rerating cannot be ruled out.

Forecast. Unchanged.

Maintain NEUTRAL. Given prevailing expensive valuations, particularly amongst large cap consumer stocks, we keep our NEUTRAL stance on the sector. Of the stocks under our coverage, we prefer Hup Seng Industries (BUY; TP: RM1.38) for its favourable dividend yield of 5.4%, healthy net cash position of 12 sen/share and reasonable comparatively cheap valuations when compared against its peers. Additionally, we also have a favourable view of Carlsberg (BUY; TP: RM22.70) given the possibility of the government in clamping down on the contraband market, which would drive volumes back to the legal market.

Source: Hong Leong Investment Bank Research - 7 Jan 2019

Share this

Related Stocks

Chart Stock Name Last Change Volume 
HUPSENG 1.00 +0.005 (0.50%) 118,300 
CARLSBG 20.38 +0.40 (2.00%) 262,300 

  Be the first to like this.


402  326  492  672 

Top 10 Active Counters
 ARMADA 0.22+0.06 
 SAPNRG 0.285-0.005 
 SUMATEC 0.005-0.01 
 MYEG 1.01-0.06 
 BARAKAH 0.08+0.02 
 NEXGRAM 0.020.00 
 IRIS 0.15+0.005 
 XINGHE 0.045+0.005 
 KNM 0.09+0.01 
 ECONBHD 0.515+0.045 


1. 当遇上基本面投资法(下) 能赚钱就是好战略/冷眼 【冷眼专栏】漫漫投资路
2. 当遇上基本面投资法(上) “反向”战略非唱反调/冷眼 【冷眼专栏】漫漫投资路
3. Fear on Bumi Armada is probably overdone - felicity Good Articles to Share
4. THE PERCEPTION OF P/E or: How I learned to fear my Wife the bursa journey that worked for me. 2000-2019
5. Stocks on Radar - Elsoft Research (0090) AmInvest Research Reports
6. FPI FY19 revenue growth expected to hit 15% FPI 2大因素前景看好台灣聯友今年再 尋突破
7. Is QL Resources worth investing now? kcchongnz kcchongnz blog
8. [转贴]《东方华尔街》告诉你,炒家如何炒高一只股 Good Articles to Share
Partners & Brokers