Investment Highlights

• Consumer sentiment to remain soft in 2024. Malaysian Institute of Economic Research (MIER) consumer sentiment index in 3Q23 declined by 13% QoQ to 78.9 points. This reflects concerns on job opportunities, inflation worries and income growth. Moving forward, we believe consumption spending will taper as consumers become more discerning in purchase decisions on consumer goods. We expect consumer spending to be cautious ahead from lower real disposal income and impending subsidy rationalisation on food as well as potential upside risk to inflation from extension of fuel subsidy rationalisation to RON 95 in 2024. Recall that the government has recently announced the roll out of targeted subsidy programmes for petrol in 2H2024.

• International tourists and travellers are likely to be cautious in spending due to macro headwinds. Sept 2023 saw retail trade in Malaysia improving 5.5% YoY, backed by modest improvement from retail sales of non-specialised stores (+9% YoY) and retail sales of F&B and tobacco in specialised stores (+12.5% YoY). However, we expect only a marginal YoY growth for retail sales in 1H2024 as revenge spending waned while economic challenges impacted disposal income of consumers. Retail Group Malaysia (RGM) forecast a retail industry growth of 3.5% in 2024 (vs. 2023F of 2.8%) but cautioned on the likelihood of higher cost of living going forward.
  
  Government intends to implement visa-on-arrival facilities, social visit passes and multiple entry visas to encourage the entry of tourists and investors, especially from India and China as announced in Budget 2024. Nevertheless, due to macro headwinds, we anticipate arrivals and spending by tourists to be cautious in retail outlets.

• Consumers, particularly B40s and M40s who are more price sensitive are expected to spend wisely and turn to more affordable/unbranded items as well as seek promotional deals. Thus, we recommend PADINI (BUY; FV: RM4.68) and MR DIY (BUY; FV: RM2.60) for their competitive pricing and product affordability for the mass market which will be well received by B40s and M40s. Consumption expenditure in 1QCY24 will be supported by: (i) higher footfalls in retail outlets/malls during festive seasons, and (ii) cash support by government (under Sumbangan Tunai Ramah handout).

• Decline in commodities prices to result in better gross profit margin for certain F&B players. The trends in commodities prices are mixed with cocoa and sugar still trending upwards (+78% YoY for cocoa and +33% YoY for sugar) in November 2023. Meanwhile, coffee, corn and soybeans prices have declined from the peak by 10%-14% since June 2023. Notably, corn prices slid 30% since the peak in January 2023. We expect certain F&B players such as Nestle (HOLD, FV: RM129), Power Root (HOLD, FV: RM2.18), LHI (BUY, FV: RM0.95), and Spritzer (BUY, FV: RM2.27) to benefit from the downtrend of commodities prices and depleting high-cost inventories as gross profit margins are expected to improve in subsequent quarters ahead. In 3QCY23, F&B players like PWROOT and Spritzer have experienced marginal QoQ improvement in gross profit margins by 0.6%-3%-points, while LHI’s EBITDA margin rose 4%-points QoQ.

• Downgrade the sector to NEUTRAL (from OVERWEIGHT) on cautious spending ahead impacted by macroeconomic factors and downtrading tendencies as consumer seek for: (i) competitive pricing or unbranded items, and (ii) smaller size or value packs of food & beverages. Our top picks are LHI for its fully integrated operation, which cushions against inflationary shocks as well as the recently announced lifting of ceiling prices for chicken and eggs, which revitalised its earnings prospects. Additionally, we like Spritzer for its strong local branding and gradual increase in tourist arrivals, which will boost sales growth momentum as well as expectations of improved margins from the decline in cost of raw materials such as plastic resins.

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

• Catalyst for positive rerating of sector: (i) lower interest rate and inflationary pressures will help to improve consumer sentiments, (ii) recovery in global economy with an increase of job opportunities could support increased consumer spending as well as raising disposal income per capita, and (iii) higher tourist arrivals to support the economic recovery and domestic consumer players.

• Maintain 3-star ESG rating. We maintain a 3-star ESG rating on the consumer sector. To mitigate environmental risk, consumer companies are cutting water, electricity, and energy usage. The local F&B industry has been making efforts to reduce food waste and moving towards plastic-free operations. The retail companies plan to reduce plastic-carrier bag usage, eliminate forced labour, and narrow gender pay gap.

• Key risks and further potential downgrade. Slower-than-expected economic growth, supply chain disruptions, unfavourable weather that affects commodity prices and higher-than-expected unemployment rate are key risks to our Neutral rating. Potential downgrade factors include stagflationary pressures that would lead to higher commodity prices but lower consumer spending.

Source: AmInvest Research - 29 Dec 2023