Improving domestic consumption. Retail sales rebounded in 1QCY24, mainly underpinned by festive spending. We continue to expect domestic consumption to drive growth, due to stable unemployment rate on a recovery in the manufacturing sector, supported by the return of tourists. These should have spill-over effects on the retail and Hotel, Restaurants and Café (Horeca) sector. EPF Account 3 withdrawals should help to spur consumer spending, although we believe that it will mainly be channelled to staple goods instead of big ticket items. Additionally, the bump into civil servants’ salary by end of 2024 as announced by the Prime Minister should also lift consumer spending.

Consumer sentiment cooled by 2.3 points to 87.1 points, as consumers remained wary over persistent inflationary pressures. We expect consumer sentiment to improve slightly in 2HCY24 though still below the optimism threshold of 100 points. We anticipate an improvement in labour market conditions given the stronger export demand for electronics and electrical products and recovery in international tourists to boost consumption.

Stabilization in commodity prices. Although there has been a slight rebound in wheat prices recently due to unfavourable weather conditions in wheatproducing countries, it is still significantly lower (-c.50%) than its peak back in 2022. Other major commodity (corn, soybean, sugar and milk) prices have remained stable and we anticipate a downward trend in 2HCY24, on an increase in supply from key producers. As such, we believe that it should benefit F&B producers like QL Resources, CCK Consolidated (corn and soybean meal) and Able Global (milk and sugar).

Egg subsidy still ongoing. In light of lower input costs, the government has recently reduced the retail price for Grade A, B and C eggs by 3 sen per egg to 42 sen, 40 sen and 38 sen respectively. The lower egg prices should cushion the effects of inflation. Recall that the government will provide a 10 sen subsidy per egg. There has been no formal indication as to when the egg subsidy will be removed for now. Based on our channel checks, the current egg supply is sufficient, though still tight. Should the subsidy be removed, we believe that it will affect poultry players’ margins (QL and CCK). However, we believe that the impact will be short-lived as the market forces will move egg prices towards an equilibrium, which should see profit margins normalize.

Maintain Overweight. While the impact on inflationary pressures due to subsidy rationalization remains uncertain, we remain positive on the outlook of consumer staple goods, given its defensive nature, higher consumer disposable income on EPF’s withdrawal scheme as well as salary hikes of civil servants. Our preferred pick for the sector is Able Global, as we expect stronger contribution from its Mexico operations and robust demand for dairy products.

Source: PublicInvest Research - 26 Jun 2024