Investment Highlights

• 2QCY23 results largely within expectations. Out of the 9 companies under our coverage, 6 came in line with our expectations while 3 under-delivered. Guan Chong (GCB) (HOLD, FV:RM2.47) was impacted by a margin squeeze due to lower butter ratio and heightened finance costs from increased interest rates while MyNews (MYNEWS) (HOLD; FV:RM0.49) recorded net losses for 2 consecutive quarters from low economies of scale of its food processing centre and a longer gestation period for CU stores’ contribution to group’s earnings.

• Sector earnings up by 27% QoQ. The improved sectoral earnings performance in 2QCY23 was mainly buoyed by: (i) better product mix together with higher average selling prices and sales volume for Leong Hup International (LHI) (BUY; FV:RM:0.79) and Spritzer (BUY; FV:RM1.81) and (ii) declines in raw material and freight costs resulting in a better gross profit margin for PADINI (BUY; FV:RM5.70) and MR DIY (BUY; FV:RM2.60).

• Consumer sentiments remain above 2019 levels. The Malaysian Institute of Economic Research (MIER) consumer sentiment index declined by 8.4 points to 90.8 points, yet still above the average of 86 points in 2019. Our in-house economist’s 2023F GDP growth of 4% supported by sustained domestic demand despite external uncertainties. Moving forward, we believe that the domestic consumption spending can be sustainable, underpinned by: (i) persistent moderation in inflation to 2% in July 2023 (vs. 2.4% in June 2023), (ii) stable labour market with unemployment rate of 3.4% in June 2023 (vs. 3.5% in May 2023), (iii) targeted subsidies and cash aid supported by government and (iv) gradual improvement in tourism sector.

• Sustainable retail spending ahead despite macro headwinds. Retail trade in Malaysia improved 5.5% YoY backed by improvement from sales in non-specialised stores (+9% YoY) as well as F&B and tobacco in specialised stores (+12.5% YoY). We expect continued retail sales growth in 2HFY23 albeit softer than the 13% YoY increase in 1HFY23 due to the high base effect of revenge spending post-movement restrictions last year and slow progress of China’s economic recovery. Nevertheless, we expect higher consumer expenditures in 4QCY23 than 3QCY23 due: to (i) higher footfall driven by seasonality, (ii) cash support by the government (Sumbangan Tunai Rahmah (STR) – handouts of total RM3bil in November 2023), and (iii) stable job market.

• Declining commodity prices indicate better margins ahead. A mixture of prices for commodities such as cocoa and sugar are still trending upwards (+53% YoY each) as of September 2023 while coffee, corn and soybean have been declining from their peaks by 13%-31% since April 2023. We expect some F&B players’ margins to benefit from the downtrend of commodity prices coupled with depleting high-cost inventory in upcoming quarters. We also understand that some players revised average selling prices on certain products by 5%-10% to offset rising costs and protect margins.

• Maintain OVERWEIGHT call on solid local demand, particularly sustained household spending backed by a resilient labour market. Our top picks for retailers are (i) PADINI for its competitive pricing and solid market share in the apparel industry as well as affordable product offerings for the mass market of B20 and B40, and (ii) LHI for a fully integrated operation, which provides a cushion against inflationary shocks. For F&B player, we favour POWER ROOT (PWROOT) (BUY; FV:RM2.67) for strong sales traction from export markets and better operational efficiency to protect margins.

• Key risks. (i) Slower-than-expected economic growth, (ii) higher-than-expected unemployment rate and (iii) higher-thanexpected commodities prices.

Source: AmInvest Research - 14 Sept 2023