Consumer - Muted Year Ahead?

Date: 03/01/2019

Source  :  KENANGA
Stock  :  AEON       Price Target  :  2.00      |      Price Call  :  HOLD
        Last Price  :  1.01      |      Upside/Downside  :  +0.99 (98.02%)

We reiterate our NEUTRAL rating on the consumer sector. 2019 could be a challenging year with the adoption of new policies, which may put some pressure on consumer spending. Additionally, absence of sporting events this year could translate to less impulse-driven consumption. MYR has continued to weaken, which could drive costs up for importers but may benefit some exporters. Despite this, consumer stocks performed better than the benchmark FBMKLCI index against year-end sentiment pressure and we expect this to persist, given the relatively stable nature of the sector in comparison to other sectors. For 1Q19, we choose AEON (OP; TP: RM2.00) as the top pick for the sector. The stock is backed by expectations for meaningfully better results fuelled by better sales and cost environment.

New year, new rules. Over the course of 2018, several new regulations and measures were introduced by the new government. Several headline entries include: (i) the implementation of the new Sales and Services Tax (SST) in September 2018, (ii) smoking ban at open-air food outlets (effective January 2019), and (iii) new sugar excise duties on beverages exceeding certain content (to be implemented by April 2019). Overall, the mixed agendas could result in some downward pressure on consumer companies as higher prices and possibly lower demand could translate to poorer profits. The lack of sporting events may also be a downer for certain players, which may require a bigger boost from marketing to achieve similar results as compared to 2018, which was lifted by the World Cup event. Still, there may be some cushion in the form of higher minimum wages at RM1,100 across the country (effective January 2019, from RM1,000 in Penisular Malaysia and RM920 in East Malaysia). Additionally, consumption by the lower-income bracket could improve with the new Bantuan Sara Hidup (BSH) cash grant scheme.

Retail prospects. We expect the retailers to perform stronger in 4Q18 boosted by the usual year-end promotion and Christmas festive season which typically accounted for 30-40% of their total earnings for the year, and supported by the efficient use of resources during this event. This is in line with the Retail Group Malaysia’s (RGM) targeted sales growth for 4QCY18 at 4.7%, which is higher than the whole year targeted sales growth of 4.4%. RGM attributed this strong growth from school holiday, the 11.11 shopping festival, Black Friday sales, Christmas and pre-new year celebration sales. On the other hand, we expect 2019 to be a better year for retailers as we move away from 14th general election uncertainties and new SST implementation impact. New government measures to lessen the financial burden of B40 group such as the BSH, minimum wages and targeted fuel subsidies are expected to support consumer spending on basic necessity items, which in turn will benefit affordable apparels retailers (PADINI) and supermarket/department stores operator (AEON).

For our 1Q19 top pick, we highlight AEON (OP; TP: RM2.00). We like the stock for its: (i) expected stronger 4Q18 on the usual year-end promotion which historically accounted for 40% of earnings, (ii) absence of associates’ 1H share of operating loss at RM11.4m (divested in 1H18), and (iii) on-going operation restructuring, improving margin for retailing, and sustaining property income.

We maintain our NEUTRAL view on the consumer sector. Top-line expectations may be held back by a retracement in consumer spending as the domestic currency does not appear to be strengthening. 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, the lower forex exposure against CY18 could potentially offset the higher tax function in their respective price model. As such, we do not expect significant rerating in our applied valuation to our coverages.

We also maintain our UNDERWEIGHT rating on the sin sub-sector. Brewers could be exposed to softer top-line prospects owing to higher prices paid by consumers at on-trade locations from service taxes incurred, which could lead to down trading or shift purchases towards off-trade (i.e. supermarkets) locations, which have lower returns. On the other hand, tobacco players could see pressure from the abovementioned smoking ban, as food outlets are commonplace for cigarette consumption. While sin stocks continue to command fair dividend yields of c.4% against F&B players with c.2% on average, the potential capital downside should raise cautions to yield-seeking investors.

Source: Kenanga Research - 3 Jan 2019

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