Highlights

• The pressure faced by the sector in 2014 is expected to flow through to 2015 as we see further deterioration of growth from lower purchasing power/disposable income. This trend is especially apparent as consumers would be facing GST implementation in Apr 2015.

• Mid-to-higher end F&B and retail operator would be impacted. For stocks under our coverage, Related companies under our coverage of which will be affected are Oldtown Bhd and Aeon (M) Co Bhd. Staple products producer (Nestlé) to remain stable for its resilience nature and sin companies will remained exposed to potential hike in excise duty and declining trend in volume.

• Catalyst for Oldtown would largely come from its expansion in China under café outlet segment and its FMCG segment. Growth in profit is expected to come from margin expansion as the group invest s into packing line automation.

• We are slightly more negative on Aeon as the group faces more pressure from competitors and narrowing margins as it intensifies its marketing and promotional activities. Nestl é on the other hand will remain stable given its strong and trusted brand name. We believe 2015 will be a transition year for Brahim’s as it seeks more opportunities to diversity its earnings base from in-flight catering business.

• Brewery sub-sector will remain pressured from declining v olume due to weak consumer sentiment as well as from contraband beers. Furthermore, it is exposed to potential excise duty hike given that it has been spared from any excise duty hike since 2005.

• We remain slightly negative on tobacco sub-sector as we expect volume to remain on a declining trend (double-digit), especially from its recent hike of RM1.50/20-stick pack. We opined that the hike was too soon after the previous hike in Sept ’13, where industry volume were still suffering and took a longer period of time to normalize as compared to historical hikes.

Catalysts

• Lower-than-expected commodity prices .

• Better growth from operations outside Malaysia.

• Appreciation of MYR.

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 regulatedindustry; and (2) Competitive F&B sector with low barriers of entry.

Top Picks

• Oldtown (BUY; RM1.90)

Source: Hong Leong Investment Bank Research - 13 Jan 2015