• We are cautiously optimistic on consumer sector in 2024. Despite the expectations of resilient domestic demand supported by improved employment rate and a revival in tourism activities, we remain cautious about potential downside risks, such as the impact from subsidies rationalization initiative (SRI), a higher SST rate, and rising food inflation.

• We anticipate stable sales growth for staple goods, but recovery in margins could face pressure due to rising prices in some commodities. Discretionary segment to remain challenging, amidst weaker consumer purchasing power especially on big ticket items.

• Maintain a NEUTRAL recommendation on consumer sector. We like MRDIY due to their value-for-money products and key beneficiaries from consumer cautious spending.
  
  Weak Sentiment Despite Stable Sales in 2023. Consumer companies under coverage saw the sector's 9MFY23 earnings jumped by 11% YoY, thanks to stable sales and overall decrease in commodity prices for consumer staples stocks. However, earnings performance of most retail stocks was below our estimates due to higher operating costs (i.e., input costs, A&P, labor). In contrast, the FBM KL Consumer Index (KLCSU Index) underperformed by 3% YTD relative to FBMKLCI Index. This is attributed to lower sentiment due to margin pressure from anticipated rising commodity prices, unfavorable currency, and concerns about uncertainties in global economy as well as inflationary pressures. Cautiously Optimistic 2024 Outlook. Looking into 2024, domestic demand is expected to remain resilient, supported by better labour market conditions, a revival in tourism activities, and continued incentives for the lower-income group. Despite this, we are cautious about potential downside risks, including i) global economic challenges, ii) rising inflationary pressure caused by subsidies rationalization (especially on RON95 and diesel starting in 2H24F), iii) an increase in the Sales & Service Tax (SST) rate to 8% from 6%, and iv) the prospect of rising food inflation driven by higher commodity prices. These factors could impact demand, especially for luxury goods, potentially hurting consumption activity within the affected T20 and part of the M40 group. F&B Impacted by Elevated Main Commodities Prices. We raise our concern regarding the volatility in global commodity prices, anticipating the volatility on Cocoa, Sugar, and Robusta prices at elevated levels due to unfavorable weather condition in major producing countries. Additionally, we expect wheat prices to rise in 2024 from current lower level, driven by disruptions in global production as a result of El Nino, tighter export supplies, and geopolitical tensions. These factors collectively will exert cost and margin pressure on F&B companies under coverage including Kawan Food, Hup Seng, and Nestle. However, our in-house economics team forecast a recovery in USDMYR to RM4.40 per Dollar in 2024, could potentially create some buffer against elevated commodity prices, given that most global commodities are sourced and purchased in USD. Conversely, the stronger MYR may reduce the revenue of export-oriented company like Kawan Food (export market of c.50%). Overall, F&B players may prioritize securing higher sales volumes over maximizing margins in this challenging environment.
  
  Cautiously Optimistic 2024 Outlook. Looking into 2024, domestic demand is expected to remain resilient, supported by better labour market conditions, a revival in tourism activities, and continued incentives for the lower-income group. Despite this, we are cautious about potential downside risks, including i) global economic challenges, ii) rising inflationary pressure caused by subsidies rationalization (especially on RON95 and diesel starting in 2H24F), iii) an increase in the Sales & Service Tax (SST) rate to 8% from 6%, and iv) the prospect of rising food inflation driven by higher commodity prices. These factors could impact demand, especially for luxury goods, potentially hurting consumption activity within the affected T20 and part of the M40 group.
  
  F&B Impacted by Elevated Main Commodities Prices. We raise our concern regarding the volatility in global commodity prices, anticipating the volatility on Cocoa, Sugar, and Robusta prices at elevated levels due to unfavorable weather condition in major producing countries. Additionally, we expect wheat prices to rise in 2024 from current lower level, driven by disruptions in global production as a result of El Nino, tighter export supplies, and geopolitical tensions. These factors collectively will exert cost and margin pressure on F&B companies under coverage including Kawan Food, Hup Seng, and Nestle. However, our in-house economics team forecast a recovery in USDMYR to RM4.40 per Dollar in 2024, could potentially create some buffer against elevated commodity prices, given that most global commodities are sourced and purchased in USD. Conversely, the stronger MYR may reduce the revenue of export-oriented company like Kawan Food (export market of c.50%). Overall, F&B players may prioritize securing higher sales volumes over maximizing margins in this challenging environment.
  
  Prefer Value-for-Money Retailer. Discretionary segment remains challenging going into 2024 as spending could be curtailed, especially for big-ticket items coupled with luxury tax and heightened operating costs. Retail Group Malaysia (RGM) projects a modest 3.5% YoY growth in Malaysia's retail sector for 2024F, amid increasing costs of living and a softening consumer purchasing power. We anticipate sales for Amway premium products and AEON hardline segment to deteriorate in 2024. Despite the overall challenging outlook for the retail sector, we see value in discretionary stock under coverage, such as MRDIY. This is supported by steady store expansion, competitive pricing and a range of value-for-money products, making them key beneficiaries from cautious consumer spending.
  
  Maintain NEUTRAL on Consumer Sector. We maintain a NEUTRAL rating while remain cautiously optimistic on consumer sector, supported by resilient domestic demand and continued government incentives for the lower income group. However, players’ margins could be under pressure due to higher raw material costs and other operating expenses (i.e., A&P and labor). Our top pick for the sector is MRDIY (BUY, TP: RM2.30) due to its strategic store expansion plans, better product mix, and stable margins that will support earnings growth in the future. MRDIY is currently trading at undemanding 22x FY24F PER and offers an attractive 18% CAGR over 2022-24F. Additionally, we favor QL Resources (BUY, TP: RM6.70) given its defensive quality, with anticipated resilient demand for marine and livestock products.

Source: BIMB Securities Research - 17 Jan 2024