The loosening of MCO restrictions, gradual rolling out of vaccines and reopening of the economy is expected to result in modest return to normalcy and hence moderate recovery in consumption behaviour. As such, we upgrade the consumer sector from underweight to NEUTRAL. With valuations of retail players currently depressed and poised for better earnings in 2021, our top picks in the consumer sector are retail stalwarts FocusP (BUY: TP: RM1.02) and Aeon (BUY, TP: RM1.25).

2021 consumer spending outlook. To recap, based on DOSM data, retail spending bottomed in April-20 at the peak of MCO restrictions (this mirrored consumer sentiment, which hit rock bottom level of 51.1 in 1Q20 before recovering, Figure #1). While we note that retail spending has rebounded since then, it has mostly remained below SPLY levels, recording negative YoY (%) growth in all of the following months (with the exception of September) to date (Figure #2-3). Going into 2021, we expect retail spending to be positive YoY due to low base effect in 2020, however, negative factors remain, namely (i) chronically high unemployment levels (even higher than GFC levels, Figure #4) translating to continued downward pressure on disposable incomes; and (ii) sustained sluggish foot traffic in retail areas such as shopping malls from anxiety surrounding Covid-19. While we note that recent vaccine news is positive for overall sentiment, HLIB’s internal estimates reckon the roll out will take time, with only ~20% of the population expected to be vaccinated by end-2021.

Rising commodity prices likely to be mitigated. Along with the recovery in global consumption, many key commodities prices of consumer staples under our coverage have begun to recover between 20-35% since mid-FY20 lows (Figure #5-11). Despite strong rebound in many key commodity prices which is expected to remain going into 2021, we reckon the higher raw material costs will be mitigated by (i) stronger RM (HLIB’s internal forecast of average RM4.00/USD in 2021 vs. 2020 YTD of RM4.21/USD) (ii) better revenues from HORECA channels (hotels, restaurants, cafes) gradually returning to regular operations.

Tobacco sector reliant on government clamp downs. To recap, the government had announced measures in Budget 2021 (tightening the renewal of cigarette import licenses, limiting transhipments of cigarettes at certain ports, imposition of tax on the importation of cigarettes with drawback facilities etc.) aimed at curbing the rampant illicit tobacco trade that has come to account for the bulk of tobacco volumes (Figure #12). Our channel checks estimate that 30-40% of illicit cigarettes are imported via transhipments. While effective clamp down on this channel could drive volumes back to the legal market, we understand this process will take time to bear fruit.

Upgrade to NEUTRAL. The loosening of MCO restrictions, gradual rolling out of vaccines and reopening of the economy is expected to result in modest return to normalcy and hence moderate recovery in consumption behaviour. As such, we upgrade the consumer sector from underweight to NEUTRAL

Top picks: Recent loosening of MCO restrictions (interstate travel no longer being banned, no limit on the number of diners per table etc.) bodes well for retail players going into next year. As such, we raise our Aeon PE multiple from 12.0x to 19.0x (pegged to 2-year average), which lifts our TP from RM0.79 to RM1.25 pegged to FY21 earnings. Our call is upgraded to a BUY from HOLD previously. With valuations of retail players currently depressed and poised for better earnings in 2021, our top picks in the consumer sector are retail stalwarts FocusP (BUY: TP: RM1.02) and Aeon (BUY, TP: RM1.25).

Source: Hong Leong Investment Bank Research - 18 Dec 2020