Investment Highlights

• MoF zeroizes GST. The Ministry of Finance (MoF) has announced that the goods and services tax (GST) would be 0%, effective 1 June 2018. However, the MoF stopped short of reintroducing the sales and services tax (SST). Based on commentary from tax experts, there may be a short-term transitional period between the two tax regimes. The SST is widely expected to eventually replace GST. However, taken at face value, prices will be effectively 6% lower to end consumers during this transitional period.

• Boost to the sector. We are positive on the development as it would immediately lift consumer sentiment, and general ASPs for goods and services will ultimately be broadly cheaper to the end consumer (even after the reintroduction of SST). We cannot readily determine the precise impact to prices as it is a function two unknown variables — firstly, the degree of the SST rate, which varies between 5% and 10% and secondly, the initial manufacturing cost. The end consumer effectively pays GST on the initial manufacturing cost and the price markup by resellers. We believe that in most instances, it is effectively greater than the absolute value of SST on initial manufacturing cost solely. The boost to the sector coincides with a downcycle in agricultural commodities prices as well. Given the improved prospects to the sector, we upgrade the consumer sector to OVERWEIGHT from a NEUTRAL stance.

• Retail sub-sector. Despite the retail sub-sector being the largest beneficiary, we do not identify with any particular retail companies under our coverage due company specific driven circumstances.
  • Padini (NEUTRAL, FV: RM4.52/share): The fashion retail apparel is trading at lofty valuations. Current valuations trade at PE 15.5x CY19F, well above its 5-year historical average against a lukewarm 3-year (2017-2020) CAGR of 9.2%. Padini has grown its topline considerably over the past 3 years, saturating its in-store sales. Therefore, we think there is little upside for growth. Aside from that, the influx of disposal income could possibly mean consumers may likely uptrade away from Padini’s value-for-money positioning into more upmarket brands such as H&M and Uniqlo. Given the unattractive reward-to-risk prospects, we maintain our NEUTRAL call on Padini with a FV of RM4.52/share. Our fair value is based on a PE15x pegged to FY19F.
  • MyNews Holdings (SELL, FV: RM1.60/share): We do not think disposal income impacts spending in convenience stores significantly. Convenience stores typically derive spending driven by instant gratification of small-ticket items, food and beverage items, which we think consumers are willing to spend on. Therefore, the burgeoning disposable income would likely flow into other areas of spending. Aside from that, MyNews Holdings will be negatively impacted by the wage compression arising from new wage policies. Indicatively, minimum wage is aimed to be gradually adjusted to RM1,500 from RM1,000 over the medium term. For every RM100 adjustment to the minimum wage, we estimate earnings could be impacted by up to 3% per annum. Therefore, we maintain our SELL call on MyNews Holdings as it trades at premium valuations - PE 35x CY19F. Our FV of RM1.60/share to a PE of 27x FY19F (Oct), which is in line with 7-Eleven Malaysia’s historical PE valuations.
• Food and beverage subsector does not typically benefit from greater disposable income. However, given the unique properties and circumstances of the companies under our coverage, we have identified Power Root and Berjaya Food as the top picks for the sector.
  • Top pick for the sector – Power Root (BUY, FV: RM2.20/share): We have Power Root as the top pick for the sector. While the FMCG spending isn’t typically a beneficiary of disposal spending. the unwarranted share price decline has carved out an attractive opportunity. The initial selldown on Power Root was due to its soft earnings patch untimely coinciding with some negatively perceived uncertainty, particularly: i) institutional investor unwinding its over concentrated position of well over >12%; and ii) a reshuffle of key personnel to more relevant positions. While the selldown initially reflected Power Root’s prospects, we opine the considerably cheaper locked-in input costs (coffee and sugar) over the next 1.5 years to firmly and securely drive earnings going forward. Aside from that, the company looks to rationalise its commercial spending which typically has been 22% of revenue – against the industry average of 10-15%. For every 1ppt in cost savings, there is almost a 10% earnings impact. Our FV of RM2.20/share is pegged to 15x CY19F P/E, which is its historical average P/E. It offers an attractive dividend yield of 5.3%-7.1% for FY18F-FY20F as well. We would also like to highlight a possible share price weakness related to its upcoming results on 25 May given the quarter may fall into losses.
  • Berjaya Food (BUY, FV: RM2.17/share): We opine Berjaya Food is among the beneficiaries of greater disposable income given Starbucks revenue is typically derived by lifestyle spending. Aside from that, the in-store turnaround in Kenny Rogers Roasters coincides well with the upturn in consumer spending, as its core customer segment is positively impacted after having struggled with general affordability over the past 3 years. SSSG at KRR is coming off a low base, having contracted YoY for the past three years. Given the high operating leverage, marginal revenue growth could have an exponential impact to its bottom line. Our FV of RM2.17/share is pegged to CY19F at a PE of 25x, reflecting a 20% premium to historical valuations. We think the premium is justified by significantly enhanced earnings visibility following the disposal of KRR Indo and attractive growth off a low base – (2017-2020F) 3-year CAGR of 46%. A potential key risk to Berjaya Food is the USD/MYR forex, for every 10% appreciation to USD/MYR, earnings are estimated to be impacted by up to +3%.

Source: AmInvest Research - 17 May 2018