Investment Highlights

• 2QCY22 results generally exceeded expectations. Out of 8 companies under our coverage, 4 reported above-expected results, 3 within and 1 below. This positive report card stems from price adjustments and cost management initiatives implemented by industry players helped to offset the higher cost impact. 
  Padini Holdings (Padini) (fair value: RM3.70), Power Root (FV: RM1.90), and Berjaya Food (BJFood) (FV: RM1.03, after bonus issue adjustment) recorded a second consecutive quarter of results outperformance by sustaining their margins despite rising costs while maintaining sales recovery trajectory. We upgraded Nestle (Malaysia) (FV: RM122) to HOLD (from Underweight) after the company reported a stronger-than-expected demand recovery for its products. While the group’s GP margin has yet to recover back to pre-pandemic levels, the recent ease in raw material prices should limit the risk of further margin compression in the near term. On the other hand, Mynews’ earnings fell short of expectations due to an increase in its operating expenses relating to the CU brand’s operation. For other companies within our coverage, the earnings of Guan Chong (FV RM3.15), Leong Hup International (FV RM0.50) and MR DIY Group (MRDIY) (FV RM2.60) were Within Our Expectations.
• The sector’s 2QCY22 revenue grew 11% QoQ and 32% YoY, predominantly driven by buoyant consumer confidence as broader economic activities picked up amid the seasonal Hari Raya Aidilfitri festivity. The sequentially stronger improvement in earnings (+15% QoQ) are mainly driven by companies’ price hike exercises and reduction in Covid-19 related expenses.
• We expect consumer spending to generally sustain for the rest of 2HCY22 as feel-good sentiments over economic reopening are likely to remain intact, further bolstered by election goodies-related news flow. The government recently announced a special pay rise for civil servants, and we could expect more goodies to be dished out until the actual polling day. Assuming serving full term, the current Parliament is set to be dissolved latest by June 2023.

• Sentiments may shift swiftly next year. Global recession fears may spill over into the domestic market as consumers cut spending, bracing for the worst. The impact could be compounded by sustained widespread inflation and rising interest rates that will limit consumer spending. It remains uncertain if the tax regime could be maintained, but any indication that suggests goods and services tax (GST) could make a comeback also may put a further dent to consumer sentiments.
  Recall that when GST first implemented in 2015, consumer spending on selected items declined (Exhibit 9) and it took at least 6-9 months for recovery. This is also supported by the Malaysian Institute of Economic Research (MIER) Consumer Sentiment Index which plummeted in 4Q14 (Exhibit 10) right after GST implementation was announced during the tabling of Budget 2015. Besides fast fashion, big ticket items such as electrical appliances and information & communication equipment are relatively more susceptible to consumer spending cuts should GST be reimplemented, in our view. On the other hand, food items are likely to be less impacted.

• Maintain NEUTRAL. We remain selective with our BUY calls against the backdrop of heightened macroeconomic uncertainties. Leveraging on Starbuck’s strong brand equity, we believe BJFood is more resilient to withstand inflationary pressures compared to its peers. We like Guan Chong, which stands to benefit from recovering regional demand for cocoa products while its overseas expansion plan provides long-term growth potential. Separately, the inflationary environment would benefit MRDIY as consumers tends to gravitate towards more affordable options when shopping for household items.

Source: AmInvest Research - 19 Sept 2022