Possibility of further extension?

We do not fully discount the possibility of an extension or a change in the current price guidelines of the anti-profiteering act. While the expiration of the act should be a relief to companies as they would be able to adjust their prices more flexibly, which might lead to better margins, should it expire the quantum of price increases is not expected to be large given the environment of weak consumer sentiment. We maintain our NEUTRAL sector rating and recommend stocks with solid track records and high dividend yields, with Heineken as our top pick.

Anti-profiteering act expiring on 31 December 2016

To recap, the Price Control and Anti-Profiteering Act 2011 has regulations that stipulate retailers and traders cannot increase their net profit margins for goods and services between January 2015 and June 2016 in response to the goods and service tax (GST) implementation. Recall that this has been extended for six months until 31 December 2016.

Not discounting extension although retailers are anti anti-profiteering

While there is no word of a further extension in the anti-profiteering act, we do not discount the possibility of an extension or a replacement with a new mechanism, as we note that the period is shorter in comparison to the transitional period adopted by other countries such as Australia, where the Australian Competition and Consumer Commission established the price oversight regime and enforced it for three years to ensure that there would be no price exploitation following GST implementation. Channel checks have showed that the Ministry of Domestic Trade, Cooperatives and Consumerism (MDTCC/KPDNKK) had previously informally indicated an intention to continue with the anti-profiteering act but with an altered mechanism. We gather that some retailers want the anti-profiteering provisions to be abolished.

Should it expire, will prices increase after December?

Following the expiry, companies can increase prices of their products more flexibly; however, it may be at the expense of sales volume in an environment of weak sentiment, as seen through companies such as BAT where a price increase has led to a large volume decline. Thus, we believe there will be price increases, but they are unlikely to be too drastic as some of the companies under coverage have already increased prices throughout this year. We understand that companies are still allowed some price increases with justifications to maintain margins and pass on higher cost of goods and operating costs. For BAT, assuming a 1% increase in average selling price (ASP) with other variables kept constant, we estimate BAT’s FY17-18 net profit would increase by 2.7-2.8% yoy. For MSM, assuming a 1% increase in the sugar ASP for the domestic segment, we believe MSM’s FY17-18 net profit would increase by about 4.1-4.4% yoy.

Sales growth has been somewhat muted

Looking at YoY revenue growth for the companies under our coverage, BAT has seen 6 quarters of declines due to the large volume drop, in contrast with Hai-O which has been recovering off its low base. While MSM has seen revenue growth for the past 4 quarters, we see that margins have been hit at the net profit level due to the sharp increase in raw sugar prices.

Maintain Neutral

We maintain our NEUTRAL call on the sector as we expect 2017 to be a challenging year for the stocks under our coverage. While the MIER consumer sentiment index has slightly recovered from its all-time low of 63.8 in 4Q15 to 73.6 in 3Q16, it is still below the 100-pt threshold, and companies will also likely be hit by increasing cost of sales and operating costs. We advise investors who seek exposure to consumer stocks to focus on companies with defensive characteristics and attractive dividend yields, with Heineken as our top pick. We believe HEIM will continue to maintain its dominant position in the domestic malt liquor market because of its strong brand portfolio, corporate governance and solid brand name. Dividend yields are estimated to be at ~5% in the next 2 years. Key downside risks include increasing rivalry from competitors and contraband beers, lowerthan-expected sales volume growth and higher-than-expected operating expenditures.

Source: Affin Hwang Research - 21 Dec 2016