• The recent concluded 2Q23 earnings season for 11 companies under our coverage was largely in line with expectations, with one company surpassing and another falling short of projections. Spritzer stood out as the star performer, with net profit surging by 70% QoQ and 59% YoY respectively.

• The outlook for 2023 remains intact with stable sales growth momentum backed by a healthy job market and anticipated higher tourist spending.

• We prefer ‘staples’ due to its defensive nature, and we also like selected discretionary companies (MR DIY, Padini and AEON) for their value-for-money products as they are key beneficiaries of cautious consumer spending.

• Maintain an OVERWEIGHT call on the sector. We expect consumer sector under our coverage to register earnings growth of circa 10-12% YoY for CY23-CY24F.

2Q23 Earnings Mostly Inline

The recent 2Q23 results season for the 11 companies under our coverage was largely in line, with only 1 above (Hup Seng) and 1 below (Kawan Food) expectations. Spritzer was the star performer, with net profit surging by 70% QoQ and 59% YoY, thanks to higher bottled water sales volume, ASP, and lower raw material prices (i.e. PET resin). Conversely, Kawan Food recorded the weakest performance with core net profit declining by 18% QoQ and 41% YoY, mainly due to lower export sales and higher overall operating costs. Overall, 2Q23 sector earnings for the 11 covered stocks grew by 8% QoQ and 2% YoY, primarily driven by strong Raya festive season sales. Additionally, lower prices for some raw materials partially offset the higher operating expenses (mainly labour and electricity). The FBM KL Consumer Index (KLCSU Index) relative to FBMKLCI Index underperformed by -2% YTD, amid ongoing concerns over an inflationary environment and margin pressure stemming from rising operating costs.

Better 2H23 Outlook.

The outlook for the consumer sector in 2H23 remains positive, with stable sales growth supported by the resilient local economy, including a healthy job market and anticipated higher tourist spending. We expect consumer spending to stay resilient with the B40 group continuing to benefit from various financial assistance programmes especially for direct cash handouts. Meanwhile, the broad-based downtrend in key commodity prices and lower transportation costs could be advantages for F&B players. Additionally, the anticipated influx of tourists is expected to boost foot traffic in malls and stores, benefiting the retail and F&B segments.

Overall, we foresee sustained growth for consumer staple goods as consumers prioritize daily necessities over big-ticket items. Companies under our coverage such as Spritzer, QL Resources, Nestle, Dutch Lady are expected to profit from growing HORECA channels, lower raw material prices and better economies of scale. However, we have become more cautious on KFB's outlook following 2 consecutive earnings misses with expectations of near-term subdued demand particularly in the oversea. As for discretionary segment, Malaysia's retail growth outlook remains cautiously optimistic, with Retail Group Malaysia (RGM) projecting a 4.8% YoY single-digit growth. We see value in certain stocks under coverage, such as MRDIY, Padini, and AEON. These stocks are expected to maintain stable earnings growth, supported by strategic store expansion plans, an improved product mix, and effective cost containment efforts. Additionally, their competitive pricing and value-for-money products position them as key beneficiaries in an environment of cautious consumer spending.

OVERWEIGHT Call on the Sector.

We maintain an OVERWEIGHT recommendation based on favourable 2H23 prospects supported by i) improved consumer sentiment and household spending, driven by a resilient labour market, ii) a projected increase in tourism activities, and iii) a broad-based downtrend in commodity prices. We anticipate the consumer sector under our coverage to achieve doubledigit earnings growth of c.10-12% YoY for CY23-CY24F, with a stable margins. Overall, we favour 'staple goods' due to their defensive nature where demand is relatively inelastic and pricing power is strong. We are also bullish on 'value-for-money' retailers. Our top picks include QL Resources (BUY, TP: RM6.30), Padini (BUY, TP: RM5.00), AEON (BUY, TP: RM1.58), and MRDIY (BUY, TP: RM2.50).

Risks to our call include i) slower-than-expected economic growth leading to reduced consumer spending, and ii) an unprecedented sharp rise in input costs that could squeeze margins (e.g. escalation of the Russia-Ukraine war involving other countries).

Source: BIMB Securities Research - 5 Sept 2023