Highlights

• The pressure faced by the consumer sector in 2015 is expected to flow through to 2016 as we see further deterioration of consumption growth from lower purchasing power/disposable income. However we expect this trend to subside in 2H16 when GST has been enforced for more than a full year.

• Staple products producer (Nestlé) to remain stable for its resilient nature while sin companies will remain exposed to potential hike in excise duty and declining trend in volume.

• F&B: Catalyst for Oldtown would largely derive from its expansion in its FMCG exports segment. Growth in profit is expected to come from margin expansion as the group invests into packing line automation and benefit from the strong USD (exporting currency).

• We are slightly more upbeat on Aeon as the group is a beneficiary of a rejuvenated consumer sentiment in 2HFY16. Furthermore, its new malls that will come online in FY16 should add to the momentum of its property management segment.

• Nestlé, on the other hand, will remain stable given its strong and trusted brand name. 2016 will be a transition year for Brahim’s as it seeks to diversity its earnings base from the aviation catering business.

• Brewery sub-sector will remain pressured by declining volume due to weak consumer sentiment and contraband beers. Furthermore, the sector is exposed to potential excise duty hike given that it has been spared from any duty revision since 2005.

• We remain negative on the tobacco sector as we expect volume to remain on a double-digit declining trend, catalyzed by the recent hike of RM3.20/20-stick pack. Normalization in TIV is still remote given that the lingering issues surrounding vaping. Whilst some states have taken the lead in taking a concrete regulatory position, a lack of positioning at the federal level still casts uncertainties for the tobacco sector.

Catalysts

• Rejuvenation of consumer sentiment

• Better growth from operations outside Malaysia.

• Appreciation of MYR.

Risks

• Excise duty hike for brewery and tobacco.
• Prolonged erosion in consumer sentiment.
• Potential cuts to allocations for tourism sector, grants and subsidies due to a Budget revision.

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

Nestle (HOLD; RM69.59) Aeon (HOLD; RM2.99)

Source: Hong Leong Investment Bank Research - 12 Jan 2016