We expect the consumer sector to continue its sturdy performance on the back of (i) resilient domestic demand; (ii) improvement in supply chain; and (iii) margin stabilisation with commodity prices trending down. Additionally, we view that companies that are able to provide better convenience to customers will have the upper hand in grabbing the ringgit spent. However, this does not come without challenges as we view that the (i) weakening consumer sentiment; (ii) normalisation of revenge spending; (iii) recessionary risk; and (iv) inflation-led declines in real wages to dampen the outlook. Hence we maintain our NEUTRAL call on consumer sector. Our top picks include Bfood (BUY, TP: RM1.31) and FocusP (BUY, TP: RM1.51).

Recap. Earnings for 3Q22 were mixed, as the merits of reopening were partially dragged by inflationary pressures and rising interest rates. Out of our coverage, four came in within expectations (Aeon, Bfood, FocusP, Nestle) while one came in below (Mr DIY) and one exceeded estimates (QL Resources). Overall, the trend showed weakness in QoQ earnings with the absence of festive season (Hari Raya. Ramadhan) coupled with normalisation after the reopening highs. Meanwhile YoY improvement was largely thanks to the low base effect from suboptimal business operations in FY21. Margins continued to be challenged with the higher input costs (raw materials, higher min wages, hike in of electricity tariff surcharge).

Decent but with downward risks. Core inflation continued to rise in Oct 2022 at +4.1% YoY (Sep: +4.0% YoY), signalling build-up of underlying inflationary pressure. Despite, the improvement in labour market in Oct with the decline in number of unemployed persons and unemployment rate that held steady at 3.6% (Figure #1), our house opined that the pace of recovery may see a slowdown, in view of the rising global recessionary risks. This also mirrored the consumer sentiment index (CSI) that still booking below optimism threshold for the second consecutive quarter with of 98.4 points in 3Q22 (Figure #2). Dampened CSI reflects the weak perceptions of households’ expected financial positions and employment outlook brought a bout by the expected economic slowdown. Hence, consumers have turned conservative on their spending by tightening their purse strings with monthly retail sales climbing up at slower pace (Figure #3). Based on survey conducted by the Malaysia’s Small and Medium Enterprises Association, most retailers are bracing for a gloomy 2023 with two out of three retailers expecting a drop in both sales and volume. This was on the back of economic uncertainty, the increase in OPR and the normalisation of revenge shopping post pandemic.

New trend to stay. One of the trends we observe across the consumer space is the booming of ways businesses tried to clinch more spending by adapting to consumer convenience. This could be seen with (i) Mr DIY Express (smaller stores focusing on upper urban and rural town); (ii) BFood expansion of drive through outlets (priority of 50% from total planned new stores); (iii) FocusP strategy of expansion in Komugi street-shop; (iv) QL’s addition of Family Mart Mini Smart Kiosk vending machine; (v) 7-Eleven incorporating café concept in its CVS; (vi) SDS expanding their reach with collaboration with big retailers; and (vii) Farm Fresh venture in direct-to-consumer Jomcha milk tea outlets.

Sustained performance not without challenges. We expect the consumer sector to continue its sturdy performance on the back of (i) resilient domestic demand; (ii) improvement in supply chain that would ease restocking activities; and (iii) margin stabilisation with commodity prices trending down post price hikes implemented in 2021-2022 (Figure #4-8). Additionally, we view that companies that are able to pivot and provide better convenience to customers will have the upper hand in grabbing the ringgit spent. However, this does not come without challenges as we view that the (i) weakening consumer sentiment; (ii) normalisation of revenge spending; (iii) recessionary risk; and (iv) inflation-led declines in real wages and income to dampen the outlook. Hence we maintain our NEUTRAL call on consumer sector.

Top picks. We reiterate our BUY call for BFood (BUY; TP RM 1.31) based on 16x PE of FY23. We are positive on Starbucks which continues to grow via new outlet openings and higher sales from active promotions. Furthermore, a leaner concept KRR store would enable the group to continue maintaining its profitability. Secondly, we have favourable outlook on FocusP (BUY; TP: RM1.51) based on 14x PE of mid FY23. Moving forward, management stays focus in expanding both the double pillars of growth namely optical and F&B segments. Furthermore, we understand the new corporate clients in F&B are expected to come on-stream towards early of FY23 which could contribute sizable earnings to the group’s bottom line.

Source: Hong Leong Investment Bank Research - 22 Dec 2022