Stock Name: QL
Company Name: QL RESOURCES BHD
Research House: RHB

Consumer sector
Maintain neutral: The government recently raised the prices of petrol and sugar by 2.7% and 2.8% respectively, and we expect a similar hike to follow in 1H2011, in line with its plan to reduce subsidies every six months. Due to the gradual and small nature of the subsidy reduction, we believe that it will have a minimal impact on consumer spending, which RHB Research Institute projects will grow by 5.4% in 2011 (against 5.6% estimated for 2010).

The stable consumer spending growth outlook of 5.4% will provide a growth platform for the retail stocks under our coverage that derive their revenues locally. We expect Aeon's ('market perform', fair value = RM6.47) same store sales (SSS) to grow at 3.5% in 2011 (2010: 2.5%). Parkson, on the other hand, will continue to ride on China's strong consumer spending growth in 2011 (2010: 10%), which is expected to grow by 9.4%, according to consensus estimates.

We believe domestic demand for F&B products such as those manufactured and distributed by CI Holdings ('outperform', FV = RM4.90), KFCH ('market perform', FV = RM3.85) and QL Resources ('outperform', FV = RM6.50) will continue to be resilient. However, in terms of growth, we expect F&B companies to be driven by expansion in either capacity (CI Holdings), geographical (KFCH), or both (QL Resources).

Dark days continue for the tobacco sub-sector and BAT ('underperform', FV=RM42.92), as the recent hike in excise duty of about 5% per stick effectively raised cigarette prices for both premium and value segments by 7.5% to 9%. We expect the higher cigarette prices, coupled with other government initiatives to reduce smoking, to cause legal total industry volume (TIV) to contract by 6% in 2011. Unlike tobacco, the brewery sub-sector was spared a hike in excise duty in Budget 2011, marking the fifth time in a row duty was not raised. However, Malaysia's excise duty on beer is the second highest in the world after Norway.

Risks include a further drop in consumer disposable income and rising costs of goods and services, reducing spending power.

We maintain our 'neutral' stance on the sector. Our top pick is CI Holdings as we are optimistic on its growth outlook. In our view, the stock is still inexpensive relative to its F&B peers. ' RHB Research Institute Sdn Bhd, Dec 28


This article appeared in The Edge Financial Daily, December 29, 2010.