Investment Highlights

• While valuations are trading below historical standards, they fairly reflect unconvincing earnings outlook growth of 10.7% (refer Exhibit 5). Remain NEUTRAL on the consumer sector. Risk factors such as a weakening MYR, competition and soft consumer sentiment have either largely diminished or reached a bottom. However, the impending outlook remains weighed by a tepid recovery in the aforementioned risk factors. Instead, we look at laggard plays as our TOP PICKS for the sector that we think has bottomed out:
  • Berjaya Food (BUY, FV: RM1.77) for i) its attractive growth off a low base, offering a 3-year earnings CAGR of 22%; ii) innovative, yet resilient Starbucks brand; and iii) rationalisation of non-performing stores have positioned KRR Malaysia to see 2 consecutive quarters of positive SSSG. Valuations are pegged to a P/E of 25x, reflecting a 20% premium to its historical valuations.
  • Bonia (BUY, FV: RM0.75) is attractive for: i) its Braun Buffel brand commanding a regional appeal – with Indonesia supplementing growth; ii) closure of its underperforming consignment stores to alleviate FY18F earnings growth; and iii) attractive valuation, which currently trades at a forward P/E of 12.5x, below its 5-year historical average P/E of 14.5x.

• We also highlight two scenarios that may carve out opportunities within the consumer sector over the next 12 months: i) a strengthening MYR and ii) a slump in commodities prices. Berjaya Food and Padini are beneficiaries of a stronger MYR. 50% of Berjaya Food’s raw material is purchased in USD while most of Padini’s raw material is sourced from China. For every 1% appreciation in the MYR against the USD and RMB, FY18 earnings are estimated to be impacted by up to 2.5% and 5% respectively. Meanwhile, OldTown and Cocoaland are largest beneficiaries of cheaper commodities prices. Coffee and sugar inputs combined constitute close to 30-50% of raw material cost for these two FMCG companies. Given the companies’ inventory replenishment cycle and subsequent recognition of cheaper inputs, it could translate to better gross margins in 1Q18.

• Lastly, we expect similar targeted measures during Malaysia’s Budget 2018 as with the previous budgets, but unlikely to be game-changing. We do not expect the 2018 Budget to lift consumer sentiment significantly. Diminishing goodwill consumer sentiment brought about by an expected BR1M programme is likely to remain weighed by the rising cost of living, elevated household debt and eroding affordability as Malaysian consumers are undergoing the longest period of pessimism in its history. It surpasses those of the Asian financial crisis (AFC) and global financial crisis (GFC) in 1997 and 2007 respectively. Recovery has been protracted and we expect the status quo to extend in the near future.

Source: AmInvest Research - 19 Sept 2017