• We upgrade to Overweight (from Neutral) the Consumer sector as we believe the sector outlook is set to improve further, especially with the reopening of economy and vaccination rollout.

• Retail sector is a key beneficiary of reflation theme as consumer confidence re covers sharply and spending returns.

• We revise our FCMG company’s earnings estimates from 11%/6% to 26%/10% for FY21F/FY22F growth on the back of i) relaxing MCO, CMCO measures taking in place ii) surplus disposable income stemming from I - Sinar withdrawal and iii) better cost efficiency ahead due to stable raw material prices.

Set for recovery

KL Consumer index fell 8% in 2020, to the lowest level seen in 4 years. The FCMG sub sector which has been known as defensive was not spared as the Covid-19 spread fast and affected the restaurant industry. This resulted in weaker demand particularly its Out-of-home channels. The retailers were also affected as borders were closed and shopping malls are forced to impose strict SOPs which led to an abrupt drop in footfall. Nonetheless, the gov ernment had introduced many financials assistance via i-Lestari/ i-Sinar withdrawal, BPR, and 6-months loan moratorium, to improve further people’s disposable income in order to revive consumer spending. In our view, the government’s pledge and commitment to support business recovery through various stimulus packages introduction i.e. Wage Subsidy Programme (WSP), Prihatin Rakyat Economic Stimulus Package and the National Economic Recovery Plan, so far has been effective in reducing the impact of the recession on employment. This is solidified by the MIER surveys, as business condition index (BSI) has shown an im provement of 115.4 pts (+29.1 pts, qoq) in 4Q20.

Overweight on the sector

We revise upward Nestlé’s earnings by 11%/16% for FY21 and FY22. We also increased Dutch Lady’s forecast by 34%/39% as we assume that their HORECA channels demand to improve further due to i) relaxing MCO,CMCO measures taking place ii) surplus dis posable income stemming from I - Sinar withdrawal and iii) better cost efficiency ahead due to stable raw material prices.

We argue that the market has already factored in short-term earnings risk and believe these stocks deserve a rerating on positive vaccination rollout. We upgrade Nestle and Dutch Lady to Buy (from HOLD) with newly DDM and DCF-derived TP of RM154.20 (from RM144.20) based on (WACC of 5.9%) and RM49.60 (from RM34.50) based on (WACC of 7.0%). This implies FY21F/FY22F PE of 53x/47x and 38x/35x.

We upgrade Overweight (from Neutral) on the Consumer sector as we believe the sector outlook will continue to improve in 2021. We see no reason for the FCMG and retail companies to underperform moving forward as we feel consumers have ad justed to the new norms of shopping experience coupled with recovery in the econ omy.

Source: BIMB Securities Research - 18 Mar 2021