HLBank Research Highlights

Author: HLInvest   |   Latest post: Fri, 5 Jun 2020, 9:13 AM


Consumer - Hide Under the Yield

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The Covid-19 outbreak has sent share prices tumbling. With many companies facing uncertainty in earnings associated with the lockdown period, we maintain our UNDERWEIGHT stance on the sector. In this uncertain time, we select two which are relatively more defensive, namely BAT and HSI with high yields of 12.0% and 7.8%, respectively as our top picks.

The Covid-19 global outbreak and subsequent government imposition of a 14-day Movement Control Order (MCO) from March 18th to 31st will impact corporate earnings and investor confidence. Despite this, sharp decline in recent share prices have birthed a number of possible nibbling opportunities.Severe impact on consumer discretionary items. We expect consumer discretionary stocks to be particularly impacted from the Covid-19 lockdown. While we note that restaurants are permitted to fulfil deli very and take-away orders, they will not be permitted to be operate dine in. We expect delivery volumes to increase significantly, however, reduced sales from the absence of dine in revenues will have a particularly adverse impact on BFood (Starbucks and KRR operations). We lower our BFood FY20/21/22 forecasts by 16.7%/4.5%/1.0% and PE target from 22x to 15x to reflect the uncertainty in earnings (note that Starbucks Corp (USA) is trading at 20x PE currently. We reckon the discount to the parent company is justified given BFood’s high net gearing of approximately 85% and the earnings drag from KRR operations, which we expect to post losses in FY20. After our PE multiple and earnings adjustment, we lower our TP from RM1.40 to RM0.80. Downgrade BFood from Hold to SELL. In the case of FocusP, all optometry outlets will cease operation during the duration of the lockdown. In addition to already weak shopping mall foot traffic from Covid-19 outbreak which will impact their optometry and Komugi retail business, we expect FocusP to report significantly weaker sales in 1Q20. Despite this, we understand that F&B division’s sales volume to corporate clients (particularly their convenience store client) who are still operational during the lockdown period have increased. However, as the optometry business makes up the bulk of FocusP’s earnings, we cut our FY20/21 earnings forecasts by 20%/3.4% to account for lower optometry sales. Additionally, we lower our PE multiple from 17x to 8.5x to account for uncertainty in earnings as we expect the recovery in foot traffic to shopping malls will only kick-in in 2H20 at the earliest. After our earnings adjustment and PE change, our TP falls from RM0.85 to RM0.37 sen based on mid-FY21 earnings. Downgrade FocusP to HOLD from Buy. (Bfood: SELL, TP: RM0.80) (FocusP: HOLD, TP: RM0.37) Brewers’ double whammy. For brewers, we expect the absence of on-trade (bars, restaurants, etc.) sales during the lock down period to have an adverse impact on sales. Note that Carlsberg already shared they have seen a 10-20% decline in sales from bars vs. SPLY even before the lockdown was announced. Furthermore, Carlsberg have shared that they (and by extension Heineken) have been ordered to temporarily cease production as they have been deemed a non-essential service during the duration of the MCO. In totality, we expect brewery sales in 1Q20 to decline by 15% YoY. We expect Heineken to take this opportunity to promote their online delivery service drinkies.my, which delivers Heineken products to your doorstep within one hour. Despite this, we understand this makes up a small portion of the group’s revenue, as such we don’t see a significant impact contribution from this venture at this juncture. We lower Carlsberg and Heineken’s forecasts FY20/21 forecasts by 12.7%/10.0% and 14.2%/13.7% to account for weaker sales. Despite the steep decline in share prices for both brewers Carlsberg (-49.3%) and Heineken (-36.4%) since CY20 peak, we maintain our HOLD calls on both with lower TPs of RM18.60 and RM17.85, respectively. This is based on DCF valuation methodology of (WACC: 9.5%, TG 2.5%) for both counters

from previously Carlsberg (WACC: 7.0%, TG: 3.0%) and Heineken (WACC: 7.5%, TG: 2.5%). We reckon a higher WACC is justifiable given the uncertainty of the duration of the Covid-19 outbreak at this current juncture. (Carlsberg: HOLD, TP: RM18.60) (Heineken: HOLD, TP: RM17.85) 

Nestle. Panic buying in 1Q20 will benefit Nestle as consumers stock up on staples with long shelf lives (Maggi Mee, Milo powder etc.). However, we maintain our SELL call on Nestle given that valuations remain demanding at 42.0x PE. At this juncture, we reckon there are other more attractive stock picks in the sector trading at cheaper valuations. (Nestle: SELL, TP: RM102.00) 

Aeon. While Aeon should see a short term bump in sales in their retail division from panic buying, we expect the group to be net losers from the Covid-19 outbreak due to non-essential retailers shutting down operations in their shopping malls. Note that in FY19, the retail division accounted for ~25% of the Aeon’s earnings at the EBIT level. Despite the short-term bump in retail sales, we expect Aeon to record lower earnings in FY20 as we expect the property management services division to record lower earnings as a portion of their earnings are linked to a percentage of tenant sales. As foot traffic was cratering even before the MCO was announced, we lower our FY20/21 forecasts by 9.2%/2.5%. We maintain our HOLD call with a lower TP of RM0.96 (from RM1.32 previously) based on a lower PE multiple of 12x (from 15x). Note that Aeon traded at 12x PE during the H1N1 outbreak. (Aeon: HOLD, TP: 0.96) 

Top picks BAT and Hup Seng Industries are strong dividend yielders. At current price levels, BAT yields an attractive 12.0% based on our FY20 dividend forecast. While illicit cigarettes continue to make up the bulk of tobacco volumes in Malaysia, we do not expect it to grow any further (note that illicit market share has plateaued for two years now, between 61-65%). However, we expect down-trading from premium brand Dunhill to VFM brand Rothman’s to continue to plague BAT. Note that we have already accounted for this in our FY20 forecasts, which represents a 12.5% decline from FY19 earnings. In the case of Hup Seng industries (HSI), we expect the group see a short term bump in sales from panic buying associated with Covid-19 lockdown. As the company has shared they plan to continue paying our circa 6 sen per share for the foreseeable future, we reckon this represents good value, at 7.8% yield. Upgrade HSI to BUY, TP unchanged at RM0.93. (BAT: BUY, TP: RM15.00) (HSI: BUY, TP: RM0.93)

UNDERWEIGHT. Covid-19 outbreak and subsequent market turmoil has led to share prices tumbling. With many companies facing uncertainty in earnings associated with the lockdown period, we maintain our UNDERWEIGHT stance on the sector. In this volatile time, we select two which are relatively more defensive, namely BAT (BUY, TP: RM15.00) and HSI (BUY, TP: RM0.93) with high dividend yields of 11.2% and 7.7% respectively as our top picks.

Source: Hong Leong Investment Bank Research - 24 Mar 2020

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