• Companies under coverage recorded lower earnings performance Padini (-52% yoy) and Nestle (-21%), mainly due to Covid-1 outbreak which prompted the government to implement the MCO.

• For 1QCY20 (Jan-Mar) Padini (3QFY20) recorded earnings below that were expectation, whilst Nestle (1QFY20) was in line with expectations.

• We remain NEUTRAL on the consumer sector. Consumer spending expected to remain soft until end of the year.

Retailers are struggling under MCO & CMCO enforcement

It has been a struggling environment for the consumer sector especially in the retail subsector due to Covid-19 pandemic. We saw MCO measures, which took almost 8 weeks and CMCO extended until June 9, had negative impact on retail companies. Having to bear the brunt of lower sales volume and high fixed operating cost, this situation has impacted retailers to the bone. Under PRIHATIN package, an allocation of RM10bn was given out as one-off cash payments targeted at the M40 group and below. This probably can shore up short-term consumer spending and lessen any adverse impact to local retailers but not for long, in our view. We think retail companies with net cash position are able to stand this current headwinds. However, companies relying on the old brick and mortar businesses, could struggle, as the MCO has changed consumer spending pattern more toward online shopping experience. We foresee retail players who are better equipped on online business will stand to benefit more and lead the industry moving forward.

F&B players position remain idle

Initially, food security was among the main issues during early days of Covid-19 outbreak. We witnessed seismic shifts on consumer habits as panic buying arise, and putting supermarkets’ inventories out of supplies. However, as strict social distancing measures took place and situation normalises, the initial excessive buying pattern disappeared. Consumers then shifted behaviour to only spending on necessary products and less purchases of discretionary items.

Earnings forecasts

Overall, 1QCY20 (Jan-Mar) companies results under our coverage were mixed, as Padini (3QFY20) earnings came in below, while Nestle (1QFY20) was inline with expectations. During the period, we made a revision to Padini’s forecast, imputing lower profit margin which we expect to be under pressure. We expect stringent measures by retailers, ie temperature screening, 1 meter distancing measure, limitation access into departmental store, fitting/ trying garments practise not allowed, to result in weaker consumer demand for discretionary products. Nevertheless, we retain our Nestle forecast on the back of its dominance within the F&B products (Milo & Maggi) space and also its ongoing effort to expand new manufacturing capabilities, which includes expansion in Maggi noodles capacity factory. To recap – Nestle has allocated total capex of RM280m this year, the biggest since the 6 last years

Post-CMCO: 2H2020 outlook remains muted

With the global recession taking place in the next quarter, frugal spending habits on food and clothes are expected to be the norm. We assume there is a shift on consumers’ behaviour as it would take some time for people to get used to the “new normal” – unpleasant and strict shopping experience, coupled with health risk of going to the mall to Covid-19. We remain NEUTRAL on consumer sector as we expect consumer spending to remain soft until end of the year.

Source: BIMB Securities Research - 4 Jun 2020