Investment Highlights

• Maintain OVERWEIGHT recommendation on the sector. The demand and supply recovery remains intact as the economy gradually reopens. With economic activities picking up and Covid-19 daily cases remaining low, we noticed optimism in consumers’ future spending as reflected in the Consumer Sentiment Index. The ongoing efforts to promote booster shots may offset fears of the new Covid-19 variant threat. The sector is ripe for transformation and growth with the large number of small-to-mid cap companies with expansionary potential, coupled with pivoting opportunities underpinned by changing consumer preferences.

• Consumer Sentiment Index hits 3-year high. The Malaysian Institute of Economic Research’s (MIER) Consumer Sentiment Index surged to 101.7 points in 3Q21, its highest level since 2Q18, exceeding the optimism threshold as the economy reopens and Covid-19 daily cases remain low. The MIER attributed the improvement to the strong inflationary outlook as well as financial and employment expectations among consumers. With the gradual pick-up in economic activities, reopening of borders, and ongoing efforts to increase the booster shot rate, we reckon that consumer confidence is likely to remain elevated throughout 1H22.

• Ultra-low rate environment and cash assistance to support consumer spending. The interest rate environment is likely to remain accommodative in the near term. Our in-house view is that Bank Negara Malaysia will maintain the overnight policy rate at 1.75% in the 1H22, before a potential 25bps hike rate in 2H22. The RM8.2bil Bantuan Keluarga Malaysia cash assistance announced under Budget 2022 is 9% higher than 2021’s Bantuan Prihatin Rakyat, providing an additional boost to consumers’ purchasing power. Separately, the broad-based economic recovery is also set to reduce the unemployment rate to 4.2% in 2022 (from 4.6% in 2021).

• Improving consumers’ mobility due to the relaxation of movement restrictions is set to benefit retailers which are currently seeing improving footfall in their outlets. Google’s Community Mobility Data showed that Malaysia’s retail mobility is currently at an encouraging -3% of the pre-pandemic baseline (Exhibit 2). This means that retail activity has returned to 97% of pre-pandemic times. Meanwhile, Mynews Holdings (Mynews) (fair value RM1.18) are seeing a normalization of consumer spending pattern after its outlets reported a 24% sequential improvement of footfall in 4QFY21 (FYE Oct). The company expects this trend to continue as its retail stores’ resume its normal operating hours. Foreseeing further recovery within the retail space, Retail Group Malaysia is forecasting retail sales to improve by 6% in 2022, recovering from the impact of the pandemic. Riding on this theme, we have BUY calls on MR D.I.Y. Group (M) (FV RM4.17) and Mynews.

• Inflationary pressure could cause margin compression. The surge in commodity prices and transportation costs may take a financial toll on the sector’s earnings. Notably, the prices of CPO, robusta/arabica (coffee), wheat and sugar climbed 36%, 54%/61%%, 33%, and 26% respectively YTD (Exhibits 4–7). Companies that could be more susceptible to this inflationary environment are Power Root (coffee), Mynews (fresh food), and Nestle (its hedging strategy may limit the impact). This could lead to ASP hikes by some industry players in order to offset the rising costs.

• Our top picks for the sector are MR D.I.Y., Guan Chong (GCB) (BUY, FV RM3.48), and Berjaya Food (BFood) (BUY, FV RM2.16). We like MR D.I.Y. for the company’s profit-generating stores in a post-pandemic scenario, proactive management and the potential of the new “MR DIY Express” store format. Meanwhile, GCB offers a positive outlook as regional demand for chocolate recovers with borders reopening. BFood is attractive due to its revamped and leaner business model. Its strong online revenue contribution, closure of non-profitable stores, and a shift towards less opexintensive drive-through and ghost kitchen formats are expected to support the group’s earnings growth in FY22F. Any weakness in its share price is an opportunity to collect, in our view.

• Key risks. The new Covid-19 variant Omicron poses a threat of another round of lockdowns and border closures. Meanwhile, continuous increases in commodities prices and the inability of industry players to pass on the increase in cost are downside risks to earnings.

Source: AmInvest Research - 30 Dec 2021