Despite the cheer and encouraging improvement on the back of economic reopening, we are cognizant on the possible re-introduction of restrictions to curb the more transmissible Omicron variant. We opine that government assistance packages and improvement in labour market would aid in consumer spending as we progress to 2022. While we remain optimistic on recovery in consumption, the spectre of elevated commodities and freight costs still lingers, undermining margins. Maintain NEUTRAL. Our top picks tilted towards our retail stalwarts namely, Mr DIY (BUY, TP: RM4.51) and FocusP (BUY, TP: RM1.03).

Lingering risk with Omicron variant. We are encouraged to witness the robust recovery on the back of economic reopening following the successful vaccination rolled out. From our channel check, the restrictions relaxation since mid-Aug helped to drive better foot traffic which subsequently recovered sales for retail players. Despite the cheer and encouraging improvement, we are cognizant on the possible re introduction of restrictions to curb the more transmissible Omicron variant if cases flare up.

Catalysts to support consumer spending. Based on DOSM data, retail spending recorded a negative growth of -2.9% on June 2021 after 3 months of positive showing on the back of reintroduction of stricter lockdown in Phase 1 (Figure #1). This mirrored MIER’s consumer sentiment index (CSI), which hit another low level at 64.3 in 2Q21 (lowest in 1Q20 51.2 during MCO 1.0 (Figure #2). Encouragingly, with gradual move to subsequent phase of NRP, retail spending registered slower contraction and marked with positive 5.1% growth on Oct 2021 reflecting a recovery. The recovery trend is in line with the CSI that exceeded the optimism threshold at 101.7 after three years (Figure #2). Besides the economic reopening, we opine that (i) government assistance packages (Bantuan Keluarga Malaysia targeted support cash handouts, lower employee EPF contributions, etc.) and (ii) improvement in labour market would aid in consumer spending as we progress to 2022. Based on latest labour stats, the employment situation continued to improve in Oct 2021 with the further resumption of economic activities including interstate travel. Employment rose at a steady pace (+0.6% MoM) and registered the unemployment rate of 4.3% (Sept: 4.5%), the lowest since Apr 2020 (Figure #3). In terms of employment by economic sector, the number of employed persons in services sector continued to trend up particularly in wholesale and retail trade; food & beverages services; information & communication; and transport & storage activities.

Elevated commodity prices. Prices for commodities continue to climb: robusta (+74% YTD), palm oil (+35% YTD) and skim milk (+29% YTD) recorded a steep rise (Figure #4-10), in tandem with the strong resumption of global consumer activities. Additionally, with the continuous supply chain disruption we opine that prices will stay elevated for the foreseeable future. We gather that despite the initiatives on internal savings and hedging policy, the prolonged volatility of commodity prices prompts staples and F&B companies to increase prices across different segment of products. Given the challenging economic environment and frail consumer sentiment, we expect demand to be affected as price sensitivity might motivate consumers to reduce consumption or switch to more affordable options. Thus, we expect patchy recoveries in our consumer universe with risk of margin compression for staples.

Vape expected to be legalised soon. The government has introduced an excise duty on liquid or gel-based products containing nicotine in Budget 2022. This development is positive to the legal tobacco industry, as it allows legal tobacco players like BAT (HOLD, TP: RM14.16) to launch their own brand of vape products in Malaysia. We understand that vaping products account for c.10% of Malaysia’s tobacco market. BAT also stands ready to introduce its own vaping brand, Vuse, to Malaysia, given that the brand is already selling in some other markets. Note that Vuse is the leading brand for vape products in US, UK, Germany, Canada and France, and BAT aspires to command market leadership for vape products in Malaysia within 3 years’ time. However, we think that this new line of product is unlikely to be earnings accretive immediately, given the heavy marketing and promotional spend in the early stages to gain market share.

Liquor license for traditional on-trade. According to recent news reports, effective 1 Jan 2022, all coffee shops and restaurants are required to have a liquor license for the sale of alcoholic beverages. We gather that the license could cost business c.RM840 to RM1,320 annually, depending on the establishment’s operating hours. This is likely to adversely impact the brewers’ sales volume, considering that (i) some businesses might opt out of selling beer given the additional financial burden, and (ii) higher selling prices to compensate for the licensing charges. The power to enforce beer sales licensing currently lies with the state governments and remains unclear as to which states would comply with the ruling, with the exception of Selangor (opted to not enforce the directive). The situation remains fluid at this juncture, but this development is negative to Carlsberg (HOLD, TP: RM20.40) and Heineken (HOLD, TP: RM22.50). That said, we do believe that the inelastic beer demand could help to soften the blow, as some of the beer sales would likely be shifted to off-trade and modern on-trade.

Maintain NEUTRAL on the consumer sector as we expect varying degrees of recoveries across our coverage. While we remain optimistic on recovery in consumption, the spectre of elevated commodities and freight costs still lingers, undermining margins.

Top picks. Our top picks are tilted towards our retail stalwarts namely, Mr DIY and FocusP. We reiterate our BUY call for MrDIY with TP of RM 4.51. We expect the steady store expansion and omni channel strategy (online, Touch ‘n Go collaboration) to shore up the company’s profitability in line with the clearer recovery picture. Secondly, we have favourable outlook on FocusP (BUY; TP: RM1.03). We remain confident on FocusP’s scalable business model as we reckon that both optical and F&B segments are able to ramp up fully once operating condition normalizes. Furthermore, we expect high probabilities of securing new F&B corporate clients given the popularity of its current product offerings.

Source: Hong Leong Investment Bank Research - 22 Dec 2021