Highlights

• Consumer sentiment recovery aided by government handouts. MIER consumer sentiment rebounded from 76.6 pts in 1Q17 to 80.7 pts in 2Q17 (see Figure 1), lending support to a stronger private consumption growth in 2Q (+7.1%; 1Q: +6.6%). We reckon this is mainly due to the government’s initiatives (which include BR1M handouts and cash handouts to ~95,000 eligible FELDA settler families) to assist the lower-income group (which has higher propensity to consume) and help economic recovery by stimulating consumer spending. Despite this, consumer sentiment remained below the threshold of 100.

• Inability to raise selling prices. Despite a stronger pace of consumption recovery in 2Q17, companies have been cautious in raising price points given the fragility of consumer sentiment amid erosion of purchasing power. Nestle shared that a price increase is a last resort and will attempt to improve profitability with cost saving initiatives. Berjaya Food’s Kenny Rogers Roasters and Oldtown’s domestic F&B business have had to implement low price menu options. Padini resorted to keep prices of apparel steady and stomached weaker margins amid weak ringgit in order to increase sales volumes.

• Firmer ringgit to have mixed impact. A firmer ringgit of RM4.22/US$ from the weakest level of RM4.48/US$ has a mixed effect on the companies under our coverage: Positive effect: Approximately 40% of Bfood’s Starbucks COGS (coffee beans, frappuccino mix, packaging material etc.) purchased from Starbucks Corp (USA) is denominated in US$ as part of their agreement with Starbucks Corporation (USA). A stronger ringgit will therefore lower the group’s raw material costs. Note that BFood had raised prices in Jan-17 to offset the higher COGS with only a marginal decline in sales volume. We do not expect the group to pass on the lower costs and see a margin expansion as a result. Negative effect: Oldtown’s FMCG exports (which account for ~65% of total FMCG sales) is Oldtown’s main growth driver going forward with Greater China (~44% of total FMCG sales) expected to grow by 10-15%. Stronger ringgit will result in slower growth in ringgit terms.

Catalysts

• Further pre-election handouts in the 2018 budget.

Rating

NEUTRAL ( ↔ )

• We maintain our Neutral stance on the sector. Despite consumer sentiment recovering in 2Q17, it is still below the threshold level of 100 and remains fragile amid erosion of purchase power. Currently, consumer stocks are already trading at historical highs, with the KL Consumer Index is currently trading around 2 standard deviations above its five year average P/E (Figure 2)

Top Picks

• For exposure, we like Nestle (Hold; TP: RM85.73) for its defensive nature and a potential beneficiary to Malaysia’s improving consumer sentiment, which may gain further ground on expected goodies from the upcoming Budget 2018.

Source: Hong Leong Investment Bank Research - 28 Sept 2017