Investment Highlights

• 4QCY22 results outperformed expectations. 4 out of 9 companies under our coverage reported above-expected results, 4 within and 1 below-expected. The majority of food & beverage (F&B) companies such as Leong Hup International (LHI) (BUY, FV: RM0.93), Spritzer (BUY, FV: RM2.90) and Power Root (PRoot) (BUY, FV: RM2.41) outperformed on higher sales volumes and selling prices, except for Guan Chong (Guan) (HOLD, FV: RM2.51). Guan’s earnings were squeezed by lower margins due to persistently flattish butter ratio despite higher sales volume.
  For retailers, Padini (BUY, FV: RM4.67) outperformed on better sales performance and prices as all outlets are operating at full capacity, in which sales were hurt by the pandemic lock-downs a year ago. Meanwhile, results of MyNews (HOLD, FV: RM0.56), Berjaya Food (BFood) (BUY, FV: RM1.25), Nestle (HOLD, FV: RM132.00) and MR. DIY (DIY) (BUY, FV RM2.60) were within our and consensus expectations.

• Earnings were up 21% QoQ. The robust sequential performance in 4QCY22 was mainly buoyed by better selling volumes and prices across consumer players, driven by gradual demand recovery in the post-pandemic era. Moreover, on top of sturdy domestic demand, the reopening of borders has also lifted export sales.
  Given the encouraging performance in the consumer segment, we raised FY23F earnings for MyNews (+21%), LHI (+26%), Padini (+30%), PRoot (+22%) and Spritzer (+5%). Nonetheless, we cut Guan’s earnings by 21% due to its underperformance. Putting all these into consideration, our aggregate calendarised sector FY23F earnings have increased by 3%.

• Strong performance likely to sustain on positive macro environment. We expect the momentum to carry on in 2023, backed by a commendable macro environment. The Department of Statistics Malaysia (DOSM) showed that Malaysia’s labour market continued to recover steadily in 4Q2022 with unemployment rate falling to 3.6% (-0.1%-point QoQ; -0.7%- point YoY), near pre-pandemic levels as labour force participation rate increased by 0.1%-point QoQ (+0.8%-point YoY) to 69.5%. Separately, on average, manufacturing wages grew 5% YoY as the sector’s economic activities increased 4% YoY whereas services payroll increased 6% YoY with its economic activities expanding 9% YoY. On a side note, the continuity of cash aid programs by the government could underpin broad-based consumer spending, especially on staple goods.

• Retail space continues to grow. YoY, volume index of retail trade in Malaysia surged 19% in 4Q2022 on the back of stellar growth in sub-segments such as automotive fuel (+36%) and other goods (+33%). Meanwhile, real private consumption grew 7% YoY during the quarter and was up 11% YoY in 2022, indicating consumer willingness to spend. The expansion was in line with the growing consumer sentiments with MIER’s consumer sentiment index (CSI) increasing to 105.3 points in 4Q2022 vs. 98.4 points in 3Q2022. Our economists projected private consumption to expand at 6% in 2023, in which companies with strong brand equity such as the likes of BFood and Padini could be the beneficiaries. Also, the returning of Chinese tourists will be supportive to the retail sector.

• Government to float chicken and egg prices. The government has announced that prices of chicken and egg will be floated after June 2023, indicating that subsidies will likely be withdrawn accordingly. We view this positively as the current costs of production for both chicken and egg are higher than the ceiling prices set by the government. As one of the biggest poultry and livestock producers in the country, LHI is set to benefit from the revised policy once it is allowed to sell at market price.

• Maintain OVERWEIGHT call on solid local demand, particularly sustained household spending backed by a resilient labour market. Our top picks for non-F&B counters remain DIY as its huge value-retailing business model appeals to the mass market as well as LHI for its fully integrated operation, which partially provides a cushion against inflationary shocks. For F&B players, we favor BFood for its strong branding that could draw footfalls continuously and Spritzer for its dominant market share that comes with certain pricing power.

• Key risks. Slower-than-expected economic growth and higher-than-expected unemployment rate.

Source: AmInvest Research - 9 Mar 2023