Investment Highlights

• We maintain OVERWEIGHT on the consumer sector. We have BUYs on Power Root (FV RM2.82), Guan Chong (FV, RM3.49), Mynews Holdings (FV RM1.66), Berjaya Food (FV RM1.57) and Leong Hup International (FV RM1.04).

• We continue to project private consumption to grow at 6.9% and expect healthy consumer spending to be sustained, on the back of a steady labour market and stable inflation. This is despite the low consumer sentiment as measured by the Malaysian Institute of Economic Research (MIER) which is at 84 points in 3QFY19.

• YTD, commodities’ prices have been mixed compared with FY18. Companies under our coverage that will be affected by changes in these commodities’ prices are Power Root, Berjaya Food (BFood), Nestle and Leong Hup International (LHI). However, we anticipate the commodities’ prices to inch up moving forward, leading to a slight downward pressure on the profitability of these companies in 2020.

• We anticipate the growth for consumer staples will be stable with sustained consumer spending and growing private consumption. Companies like Power Root, LHI, Mynews and Nestle (UNDERWEIGHT, RM111.09) will be beneficiaries of the stable growth.

• On the other hand, consumer discretionary will be more susceptible to the weak consumer sentiment and challenged by the increased competition with substitutes becoming more readily available in the market. Companies that will be affected under our coverage are BFood and Padini (HOLD, RM3.75).

• Venture overseas for growth. We expect earnings growth for Power Root, Guan Chong, LHI and Padini to be driven by its overseas expansion which offers diversification in their earnings base. Power Root plans to boost its export sales in China and the MENA region. Guan Chong plans to construct a new cocoa bean grinding plant in Ivory Coast. LHI plans to expand its operations in Vietnam, the Philippines and Myanmar to tap into the growing markets while diversifying its earnings base. Padini’s expansion plan will be in its Cambodia’s operations although at a much less aggressive pace.

• We may downgrade the consumer sector to NEUTRAL should these factors crystallise:

o Sharp weakening of the MYR against the USD (2020 house assumption average: RM4.12). BFood and Padini are beneficiaries of a stronger MYR. Half of BFood’s raw material is purchased in USD while 70% of Padini’s raw material is sourced from China.

o Sluggish improvement to economic fundamentals, leading to a derating of the sector. A sluggish recovery in economic fundamentals which could result in high operational costs and a weak MYR may dampen the recovery in consumer sentiment.

o Sharp decline in global economic conditions could negatively impact the overseas ventures of companies under our coverage. Overseas operations’ contribution to total sales in Power Root and LHI makes up circa 50% and 70% respectively.

• Top pick for the sector – Power Root (BUY, FV: RM2.82): We believe that Power Root will be a beneficiary of healthy consumer spending and exports growth. We continue to like the company because of: (1) its strong earnings recovery from streamlining of costs; (2) strong export sales growth from its planned expansion; (3) its scarcity premium for exposure to the instant coffee segment as Power Root is the closest to a pure play in the segment; and (4) a decent estimate dividend yield of 4.3–5.5% from FY20F to FY22F.

• Guan Chong (BUY, FV RM3.49): We like Guan Chong for: (i) its position which stands to benefit from the resilient outlook in the global chocolate confectionery sector and uptick in demand for cocoa powder in Asia; and (ii) its expansion plan in Ivory Coast plus plans to also further tap into the biggest chocolate confectionery market in Europe.

Source: AmInvest Research - 19 Dec 2019