Investment Highlights

• We have an OVERWEIGHT stance on the consumer sector. Although near-term prospects for the sector are unfavourable amidst the negative Covid-19 impact and global economic downturn, we expect recovery to gradually kick in in 2H2020 before improving further in 2021F. Despite weak consumer sentiment and spending, the valuations of consumer companies have become attractive due to the selldown in consumer stocks at the start of the pandemic.

• Private consumption is estimated to grow slower at 4.2% (previous forecast of 6.9%) while unemployment is expected to go up to 6% (3.3% in 2019) in 2020F due to the Covid-19 pandemic impact. We think that consumer sentiment will be mostly subdued in 2H2020 although relatively better compared with during the movement control order (MCO) period.

• We are overweight on the consumer sector as we think that a recovery is under way following the end of the MCO. Consumer demand will improve as restaurants return to business and allowed to operate. Companies under our coverage that will be most impacted by the reopening of businesses and restaurants are Berjaya Food (HOLD; FV RM1.02) and Mynews (HOLD; FV RM0.67) as these companies rely heavily on footfall of the office crowd.
• Meanwhile, poultry prices have been on the rise as shown in Exhibit 3. YTD, prices for day-old-chicks, broiler chickens and eggs grew by 118%, 42% and 16% respectively. We believe this was due to lower supply following the weak demand during the MCO which have led to a cutback on farming volume by poultry farmers. As the MCO is gradually relaxed and restaurants reopen, demand for Leong Hup’s poultry products is expected to improve. We think that the prices of poultry products will continue to be volatile as supply remains fluid (it only takes 5 to 7 weeks for a broiler DOC to grow into broiler chickens) although we can expect a bumper 2QFY20F for Leong Hup. We maintain our BUY call on Leong Hup with a higher FV of RM1.04 based on PE17x FY22F EPS (rolled over from FY21F).
• YTD commodities’ prices remain favourable. Specifically, average prices for robusta and arabica coffees, corn, soybean, cocoa and sugar have declined 15.7%, 30.0%, 11.2%, 3.3%, 4.4% and 11% respectively. Companies under our coverage that will benefit from the cheaper commodities’ prices are Power Root, Berjaya Food (BFood), Nestle and Leong Hup International (LHI).

• On the other hand, we expect near-term earnings performance of consumer discretionary companies, which are more susceptible to the poor consumer sentiment, to remain weak. However, as valuations have become attractive following a drop in some of the share prices, we have BUYs on selected companies. We have a BUY on Padini with a fair value of RM3.02/share. We forecast Padini’s net earnings to contract 40% in FY20F before recovery in FY21F with earnings growth of 34%.

• Venture overseas for growth. We expect earnings growth for Power Root, LHI and Padini to be driven by their overseas expansion which offers diversification in their earnings base. Power Root plans to boost its export sales in China and the MENA region. 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 if improvements to economic fundamentals do not materialise. A weak MYR may also result in higher raw material costs. A further decline in global economic conditions would 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: RM2.69): We believe that Power Root’s sales would remain stable despite the pandemic and global economic downturn, due to the resiliency of demand. 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 5.3-6.4% from FY20F to FY22F

Source: AmInvest Research - 9 Jul 2020