Highlights

Consumer sector is expected to mellow down after a momentous year in 2013 from lower purchasing power / disposable income due to subsidy removals.

Mid-to-higher end F&B and retail outlets would be slightly impacted. For stocks under our coverage, we do not expect Oldtown to record impressive growth under its café chain outlets. However, the slowdown could be offset by its venture in China and its growing FMCG business outside Malaysia.

Staple goods would be less impacted due to its resilience nature. For instance, Brahim’s would directly benefit from the rising number in passengers carried by MAS and higher traffic in KLIA and LCCT. Furthermore, we are expecting more asset injections to materialize in 2014, coupled with additional earnings from its sugar venture in 2015.

2014 would also be a quiet year for brewery and tobacco as these sectors continue to be exposed to the risk of excise duty hike. Furthermore, rising costs may result in increase of selling prices for alcoholic beverages, which would then cause the malt liquor market (MLM) to weaken.

The recent hike in cigarette prices post-excise duty increase would impact the total industry volume (TIV) in the legal market, while benefiting the illicit players. TIV is expected to decline by double-digit in 2014 but the quantum of increase in prices would be sufficient to offset the decline in volume. As such margins for tobacco players would widen over the longer term.

As to the recent rule on penalizing smokers who purchases cigarettes at below minimum price, we believe such move would need the expertise to pinpoint certain smokers at large who are smoking illicit cigarettes.

All in all, we remain cautiously optimistic about with the sector as we expect the slowdown in domestic consumer spending to be partially mitigated by higher tourist flows into the country in conjunction with Visit Malaysia Year 2014.

Catalysts

• Boost in tourist arrivals from Visit Malaysia Year 2014.
• Better-than-expected growth from operations outside Malaysia.

Risks

• Excise duty hike for brewery and tobacco.
• Relatively elastic demand for F&B business.
• Pandemic breakouts.

Rating

NEUTRAL

Positives – (1) Defensive industry.

Negatives – (1) Brewery & tobacco sector a highly regulated industry; and (2) Competitive F&B sector with low barriers of entry.

Top Picks

• Brahim’s (BUY; RM2.64)
• Oldtown (BUY; RM2.92)
• JTI (BUY: RM7.20)

Source: Hong Leong Investment Bank Research - 8 Jan 2014