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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 13 Dec 2019, 9:38 AM

 

Consumer - On Defensive Stance

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Maintain NEUTRAL on consumer sector. We are cautiously optimistic that consumer sentiment, and by extension, our F&B and Retail players, will be resilient against economic challenges stemming from a stable job outlook, potential further rate cut by BNM and in anticipation of supportive government policies from the upcoming budget 2020. Nonetheless, the lacklustre Ringgit outlook, which could spell further pressure on discretionary spending, remains a concern. For 4Q19, we continue to like PWROOT (OP; TP: RM2.30) as it continues to deliver strong growth numbers, reaping the benefits of its on-going rationalisation efforts and CARLSBG (OP; TP: RM27.15) for its rosy growth trajectory of its premium beer portfolio which fetches 7% FY20E CAGR, ahead of HEIM’s 5%. Both our top picks carry stable dividend yield of c.4%, which offer some measure of defence amidst the current market volatility.

Bread and Butter. Moving forward, we expect our F&B and Retail counters to be cushioned by the resilient consumer sentiment, premised on; (i) sticky demand for our consumer staples, evidenced by minimal negative impact to sales amid passive government policies (i.e. SST and sugar tax), (ii) stable job conditions, (iii) potential lower interest rate environment with our inhouse forecast putting a 75% probability of another rate cut by 25 bps to 2.75% in November, and (iv) expectations for a consumer friendly Budget 2020. Despite that, we also note that the weak Ringgit is a headwind on discretionary spending.

Visit Malaysia 2020 goodies. 2020 could be a better year for F&B players and Retailers with the launch of Visit Malaysia 2020. The Tourism, Arts and Culture Ministry is working towards achieving the target of 30m tourist arrivals that will generate around RM100b in income under the Visit Malaysia 2020 campaign. Note that, Malaysia already registered 13.4m visitor arrivals in 1HCY19 (+4.9% YoY). The top 10 source markets for arrivals were Singapore (5.4m), Indonesia (1.9m), China (1.6m), Thailand (1m), Brunei (0.6m), India (0.4m), South Korea (0.3m), the Philippines (0.2m), Vietnam (0.2m) and Japan (0.2m).Government has allocated RM1b through the Tourism Infrastructure Fund, which is available up to 31st Dec, 2020 or until depleted. The fund is available to all tourism infrastructure projects such as projects that contribute to the development of the tourism industry and not just limited to hotel, convention centre, facilities related to education, medical or agro-tourism. Retailers could tap into the fund to build around their existing infrastructure to cater for tourism activities, which may increase footfalls into their stores/malls.

Opportunity to Buy into 3Q Retailers weakness to position for a better 4Q and Visit Malaysia 2020. Retailers usually fare the worst in 3Q19 due to the absence of festivities that typically spur consumer spending. We believe that investors could use this opportunity to buy into 3Q weakness while expecting better growth in 4Q19 from year-end and Christmas festive season sales, as well as upcoming Visit Malaysia 2020 (refer to AEON and PADINI’s Quarterly net profit vs. share price table). This is in line with the RGM’s targeted sales growth for 3QCY19 at 3.2%, which is the lower than the whole year targeted sales growth of 4.4%, as well as lower than 4QCY19 targeted sales growth of 5.8%. On-going PH government measures to lessen the financial burden of B40 group such as the BSH, minimum wages and targeted fuel subsidies are expected to continue supporting consumer spending on basic necessity items, which in turn will benefit affordable apparel retailers (PADINI) and supermarket/department stores operator (AEON). We also expect more goodies in the upcoming budget 2020 for the B40 group.

For our 4Q19 top pick, we continue to like PWROOT (OP; TP: RM2.30) for its anticipated delivery of strong growth numbers, driven by: (i) continuous cost improvements, (ii) better hedged commodity positions and, (iii) new SKUS coupled with (iv) more efficiently appointed distributors providing exciting growth prospects. For a bigger market cap defensive play, we favour CARLSBG (OP; TP: RM27.15) for its premiumisation growth story which yields a 5-year earnings CAGR of 7% in FY20E against HEIM’s 5% of the same. This is on top of a possible shift in market share towards CARLSBG. Both of our top picks offer stable dividends (c.4% yield), thus providing some defence against the current market turmoil.

Maintain NEUTRAL on consumer sector. Top-line expectations may be held back by a lacklustre domestic currency. However, this could play well with net exporters where markets are independent of our local developments. Nonetheless, recovery in margins for food manufacturers could come in the way of better commodity trends. While Retailers with high import content may see a dampening impact from sales taxes, as well as from weaker forex exposure against CY18, gradual sales price re-structuring exercise could potentially offset the higher tax component in their respective pricing models. With our view that investors should take opportunity to buy into 3Q Retailers weakness to position for a better 4Q and Visit Malaysia 2020, we upgrade AEON to OP from MP and SEM to MP from UP, with unchanged TP of RM1.70 (based on unchanged 21x FY20E EPS, at -1.0SD of its 5-year historical mean PER) and unchanged TP of RM1.35 (based on unchanged 27x FY20E EPS, in line with regional peers’ average PER), respectively. We also believe that PADINI could see further upside with the exciting event next year, as such, we upgrade PADINI TP to RM4.35 from RM3.75 on higher PER of 15x (at +1SD of 5-year forward historical mean PER) from 13x (mean) of FY20E EPS.

Source: Kenanga Research - 3 Oct 2019

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