HLBank Research Highlights

Consumer - Reopening Balanced Out by Cost Pressures

Publish date: Wed, 13 Jul 2022, 09:20 AM
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This blog publishes research reports from Hong Leong Investment Bank

Alongside reopening momentum, encouraging read from employment rate, MIER consumer sentiment index (108.9 points) and increase in minimum wage to RM1,500 would support consumption. Despite that, we are cognizant on the still elevated commodities and freight costs coupled with the product price hikes that pose a threat in capping demand growth. Maintain NEUTRAL on the consumer sector. Our top picks tilted towards our retail stalwarts namely, BFood (BUY, TP: RM4.83) and FocusP (BUY, TP: RM1.34). We also favour the brewers.

Leaving behind the pandemic. Malaysia’s reopening momentum began in mid-Aug 2021 (restrictions lifted for those vaccinated) and eventually, its transition to endemicity on 1 Apr 2022 (boarders were reopened and all sectors could operate by 15 May). While this has offered the much needed reprieve for consumption following pent up demand, new headwinds have also emerged from inflationary pressures impacting input cost and potentially dampening demand.

Encouraging data reading. The latest Apr 2022 labour stats reading saw unemployment rate fell below 4.0% for the first time since the Covid-19 outbreak at 3.9% (Mar: 4.1%) (Figure #1). Employment growth gained momentum on a MoM (+0.5%; Mar: +0.2%) and YoY basis (+3.3%; Mar: +2.9%), auguring well for consumption. The labour market is expected to continue on its recovery trajectory as the nation reopens international borders and transition to endemicity which allows all economic sectors to reopen. The reopening of international borders is also anticipated to help ease the labour shortage issues, albeit at a slow pace. In line with the reopening, we saw that 1Q22 MIER’s consumer sentiment index (CSI) exceeding the optimism threshold with 108.9 points recovering from the dip in 4Q21 of 97.2 points (Figure #2). This is driven by the improvement in current incomes and jobs. Encouragingly, retail spending also mirrored similar trajectory with Apr-22 seeing a 16.6% YoY volume growth, the highest expansion in the past 4 years (baring the low base effect in Apr/May-21).

New minimum wage to support spending. Starting from 1 May 2022, the minimum wage increased from RM1,200 to RM1,500 across the country is a laudable move by the government. Up to one third of the Malaysian workforce is expected to benefit from the new minimum wage. This would increase the consumer disposable income in line with addressing labour market inefficiencies and improving the social welfare of low-paid workers. Despite that, the double edged sword creeps in with the increased in cost in doing business. We opine that apart from broad inflationary pressures, the prices for consumer goods will also increase due to this minimum wage hike.

Higher products prices. Despite the higher disposable income, we note that inflationary pressures have eroded consumer purchasing power and dampened sentiment. From our channel checks, we gather that companies have started to increase prices for their products, albeit at a much lesser extent as compared to the sharp rise of input costs, which would dent margins. Commodity prices, which were already mounting from pandemic triggered supply chain disruptions were exacerbated with the Ukraine-Russia war (Feb) and China’s zero-Covid lockdowns (Mar). We note that most commodities have started to stabilize, save for wheat (Figure #7- #9). Prices for wheat recorded a steep rise of 23% YTD (Figure #4) attributable to the Ukraine Russia war (both countries collectively account for a third of global wheat supply).

Expecting sustained performance in 2H22 for brewers. We believe the brewers will still continue to record strong performance in 2H22, as we expect beer sales to be further buoyed by the reopening of international borders as well as more mass gathering events being held. Note that Malaysia’s initial targeted tourist arrivals of 2m for 2022 was achieved within a mere 3-months and the target has since been revised upwards to 4.5m tourists. Separately, we are also not too perturbed over recent cost inflation eroding margins, as we believe that the brewers have the ability to raise prices, given the relatively inelastic demand for beer (which still remains one of the most affordable alcoholic beverage). Price adjustments for most of Carlsberg’s products have taken effect on 1 July, while plans for Heineken to raise prices is not made known yet at this juncture.

More smoking regulations. The Tobacco and Smoking Control Bill is expected to be tabled in Parliament in July and BAT (HOLD, TP: RM12.04) reckons that the full regulation of the bill will likely take effect in 3Q22. The potential generational end game could be counterproductive in our view, indirectly fuelling illicit cigarette sales as affected consumers will turn to the black market supplies instead. Implementation of the bill would also be detrimental to BAT over the longer term, owing to the gradual shrinking of customer base. Maintain NEUTRAL on the consumer sector as the benefits from a full reopening are now being weighed down by cost inflationary pressures.

Top picks. We have a favourable outlook for BFood and FocusP. We reiterate our BUY call for BFood with TP of RM4.83. We are positive on Starbucks which continues to grow via new outlet openings and higher sales from active promotions and continual innovative products. Secondly, we remain confident on FocusP’s (BUY, TP: RM1.34) scalable business model as we reckon that both its optical and F&B segments are able to ramp up fully with resumption of economic activities. The expansion in optical business will enable the group to bargain for higher rebates from its key suppliers which are mainly the established foreign brands. We opine that its resilience businesses offer a good proxy to consumer spending. We also like the brewers – Carlsberg (BUY, TP: RM27.08) and Heineken (BUY, TP: RM28.87) – given pent up demand for out-of-home drinking.



Source: Hong Leong Investment Bank Research - 13 Jul 2022

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