Highlights

• We anticipate the consumer sector will experience slow recovery. While effect of GST continues to fade, there is downward pressure on disposable income arising from weak ringgit and decline in corporate profitability. Upon the expiry of the Price Control and Anti-Profiteering Act on 31 Dec 2016, a new Price Control and Anti-Profiteering (PCAP) Regulation 2016 has come into effect on 1 Jan 2017, hence limiting companies flexibility in pricing.

• Staple products producer (Nestlé & QL) to remain stable for its resilient nature, strong brand name and exposure to the export market.

• Catalyst for Oldtown will largely derive from its expansion in its FMCG exports segment (mainly from China). Growth in profit is expected to come from margin expansion due to the weak ringgit as well as heavy marketing activity.

• We expect BFood’s Starbucks Malaysia operations to continue to struggle with low margins due to the chronic weak ringgit (40% of the groups COGS are denominated in USD) as well as unprofitable Jollibean and KKR Indonesia operations.

• We are negative on Aeon as the group is expected to suffer from depressed margins and low rental rates in the retail and property management division respectively.

• We envision a year of recovery for Brahim’s as the group looks to benefit from the eventual turnaround of MAB.

• For the brewery sub-sector, demand is expected to be inelastic despite the recent price hikes back in June 2016. Despite the industry pressures from contraband beers, we believe the increased enforcement and restructuring of the duty free distribution channels would offset the pressures on the duty paid market.

• We remain negative on the tobacco sub-sector for 2017. The sector remains at the mercy of the efficacy of the regulatory bodies in curbing the flood of contraband in the market on the back the steep excise revision back in Nov 2015.

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.

Rating

NEUTRAL ↔

• While we expect consumer sentiment to continue its slow recovery from GST, escalating costs faced by companies (weak ringgit level and higher minimum wage) will cause companies to either 1) Stomach thinner margins or 2) Pass on costs to consumers and risk lower sales volume.

Top Picks

• Carlsberg (BUY;RM15.70) , Oldtown (BUY; RM2.09)

Source: Hong Leong Investment Bank Research - 11 Jan 2017