Investment Highlights

• 3QCY23 results largely below expectation. 5 out of 8 companies under coverage reported lower-than-expected earnings. This negative variance was due to lower demand coupled with higher operational cost as follows:
  • Guan Chong (GCB) (HOLD, FV:RM2.29) was impacted by margin squeeze due to lower butter ratio and heightened finance costs from increased interest rates.  
  • MyNews (MYNEWS) (HOLD; FV:RM0.49) recorded net losses for 2 consecutive quarters from diseconomies of scale at its food processing center and a longer gestation period for CU stores to breakeven.  
  • Padini (BUY; FV:RM4.68) and Power Root (HOLD; FV:RM2.17) were impacted by softer demand due to weaker purchasing power.  
  • Nestle (HOLD; FV:RM129) was impacted by higher operational cost and effective tax rates. 
    Meanwhile, the earnings performance of Leong Hup International (LHI) (BUY; FV:RM:0.79) and Spritzer (BUY; FV:RM1.81) came in above with our expectations while only Mr DIY was in line.
• Earnings were up marginally by 5% QoQ in 3QCY23, mainly buoyed by better product mix with higher average selling prices and sales volume for LHI and Spritzer.
• Softer consumer sentiments. We observed that retailer players’ revenue declined by 3%-19% despite an increase in the number of stores in 3QCY23. We also noticed more promotional deals being carried out to attract footfalls during quiet periods, which could be to deplete high inventory levels. Thus, we believe that consumer spending trends continue to be anaemic. Moreover, we remain cautious about F&B players’ earnings due to lower demand coupled with higher fixed operational costs.

• Retail spending came off from high base. Sales value of retail trade in Malaysia showed an increase of 5.9% YoY, backed by improvement from retail sales in non-specialised stores (+9% YoY) and retail sales of F&B and tobacco in specialised outlets (+13.4% YoY) in 3QCY23. However, retail sales growth rate has been declining from a high base of double-digit growth in 2022 to a marginal growth rate in 2HCY23. This is mainly due to consumers’ lower disposal income, impacted by economic challenges.

• Declining commodities prices, resulting in better margins. F&B players like PWROOT and Spritzer have experienced marginal improvement in gross profit margins by 0.6%-3%-points QoQ, while LHI’s EBITDA margin rose by 4%-points QoQ in 3QCY23. A mixture of commodities prices, such as cocoa and sugar prices, are still trending upwards (+78% YoY for cocoa and +33% YoY for sugar) in November 2023. The prices of coffee, corn and soybean have been declining from the peak of 10%-14% since June 2023, while corn slid by 30% since the peak in January 2023. We expect some F&B players to benefit from the downtrend in commodities prices and the depletion of high-cost inventory, which could improve margins in subsequent quarters.

• We downgrade our call to NEUTRAL (from OVERWEIGHT) on cautious spending ahead, impacted by macroeconomic uncertainties and downtrading tendencies as consumers seek (i) competitive pricing or unbranded items, and (ii) smaller sized packs (value options) for F&B. Our top picks are LHI for its fully integrated operations, which provide a cushion against inflationary shocks, and Spritzer for its local solid branding and growing tourist arrivals, which will boost sales and margins amid declining raw material costs.

• Key risks. (i) Slower-than-expected economic growth, (ii) higher-than-expected unemployment rate, (iii) higher-thanexpected commodity prices, and (iv) slower-than-expected recovery in tourist arrivals.

Source: AmInvest Research - 8 Dec 2023