The consumer sector’s 2Q17 core earnings fell 4% yoy but improved from a 19% yoy drop in 1Q17. A higher qoq MIER consumer sentiment index, positive macro indicators and a firmer RM point to a recovery in 2H17E earnings. However, we believe it will take time for top line to recover, especially for discretionary spending. We maintain our Neutral sector call given valuations of 30.6x 2017E PER. Our top picks remain QL Resources (defensive name) and Hai-O (earnings growth).

Consumer Sentiment Up Slightly, Inflation Lower Though Still Elevated

MIER’s 2Q17 consumer sentiment index improved by 4.1pts qoq to 80.7, but is still below the 100-point threshold. Inflation rose by 3.7% yoy in August, mainly arising from transportation, and food and non-alcoholic beverages. Our economist maintains his 3.5% inflation rate for 2017. This report marks a transfer of analyst coverage.

MIER Retail Trade Improved on the Back of Retail Sales Rebound

2Q17 MIER’s retail trade index rose by 33.4pts qoq to 71.6 and retail sales growth rebounded to 4.9% yoy (1Q17: -1.2%). Improvement was in tandem with the MIER consumer sentiment index, indicating retailers’ confidence on sales and business conditions. Retail Group Malaysia (RGM) largely maintained its 3.7% yoy growth forecast for 2017 (vs. 1.7% yoy in 2016).

GDP and Private Consumption Recorded Stronger Growth

Both GDP and private consumption posted strong 2Q17 growth yoy of 5.8% and 7.1% (vs. 1Q17: 5.6% and 6.6%, respectively). However, private consumption growth was mainly from food & non-alcoholic beverages, restaurants & hotels, and online shopping. This may justify the weaker growth seen by retailers such as apparel and footwear. We expect the strong macroeconomic indicators to continue to benefit the F&B segment in 2H17, while the retail segment may recover at a slower pace as consumers are still cautious on discretionary spending.

Maintain Our Neutral Sector Call

While positive economic indicators are encouraging, we believe it will still take time for top-line growth to recover, especially for discretionary spending. We expect to see bottom-line improvement as companies are revising pricing gradually after the end of the anti-profiteering act in December 2016 and turning more cost efficient. But we believe this has mostly been priced in. Based on Bloomberg, the KLCSU Index trades at a 2017E PER of 30.6x (over 2SD above its past-5-year mean of 21.8x). Our top picks remain QL Resources (QLG MK, RM3.95, BUY) for its defensive nature and Hai-O (HAIO MK, RM5.09, BUY) for earnings growth. Among the brewers, we flag Heineken (HEIM MK, RM18.68, HOLD) and Carlsberg (CAB MK, RM14.88, HOLD) for their solid brand names and dividend yield.

Source: Affin Hwang Research - 4 Oct 2017