Highlights

• We remain NEUTRAL on the consumer sector for 2018. While we expect consumer spending to be stimulated with BR1M payments, tax cuts, and other cash handouts in 2018, expectations are already extremely high. Currently, consumer stocks are already trading at historical highs, with the KL Consumer Index currently trading at 32x P/E or two standard deviations above its 5-year average P/E of 23.5x.

• Consumer Sentiment: Despite consumer sentiment dipping to 77.1 in 3Q17 from 80.1 in 2Q17, we are encouraged that consumer sentiment has improved from end-2016. Nevertheless, consumer sentiment has remained below the threshold level of 100 for entirety of 2017. Alarmingly, 83% of Malaysians believe the country is in a recessionary state (Nielsen). We expect this to continue to normalize in 2018.

• Staple products producers: Consumer staples will benefit from improved consumer spending in 2018. Despite this, consumer staples under our coverage (Nestle and QL) and others (F&N and Dutch Lady Malaysia) are currently trading at or above 2 standard deviations of its five year average P/E, indicating recovery in spending is already priced in.

• Ringgit strengthening beneficiary: We expect BFood’s Starbucks Malaysia operations to benefit from the stronger ringgit in 2018 as 40% of the Starbucks’s COGS (coffee beans, Frappuccino mix etc.) are denominated in US$. HLIB’s 2018 ringgit assumption is RM4.00-RM4.20/US$ vs 2017’s average RM4.30/US$.

• Brewers: We are positive on the brewers sub sector due to healthy dividend yields, the unlikelihood of an alcohol excise hike in 2018 and the occurrence of World Cup which would boost beer consumption. Of the two brewers, we prefer Carlsberg due to its higher dividend yield and turnaround in its associate company Lion Brewery (Sri Lanka) post flooding in 2016.

Catalysts

• Rejuvenation of consumer sentiment.

• Appreciation of MYR.

• Improved tourist arrivals.

Risks

• Excise duty hike for brewery and tobacco.

• Prolonged erosion in consumer sentiment.

Rating

NEUTRAL ↔

• We expect consumer spending to be rejuvenated in 2018 with the occurrence of numerous cash handouts announced in Budget 2018, despite this, valuations in the consumer sector are stretched. We advise investors to invest in companies that will benefit from the strengthening MYR.

Top Picks

• Bfood (BUY; TP: RM2.12)

• Carlsberg (BUY; TP: RM17.90)

Source: Hong Leong Investment Bank Research - 10 Jan 2018