Our consumer sector universe recorded 3Q18 core earnings growth of 8% yoy primarily driven by large cap consumer staples. However, our expectations of a tax-holiday boost did not materialise meaningfully, particularly for retail players which saw earnings disappointment and qoq revenue declines. We do not discount the possibility of earnings improvement in 2019, as spending patterns normalise supported by a positive macroeconomic backdrop. We maintain our NEUTRAL sector call with QL Resources as our top pick.

More Disappointment and No Positive Surprises in 3Q18

For 9M18, the consumer sector recorded core earnings growth of 8% yoy mainly driven by strong performance of sector bellwethers – Nestle and QL Resources. However, 3Q18 showed relatively disappointing earnings performance overall with most companies under our coverage reporting earnings that tracked behind our forecasts.

No Apparent Boost From Tax Holiday for Retail Players

While we had previously expected the tax-holiday period to boost sales especially of retail players, this did not materialise. In fact, most of the retail stocks recorded qoq revenue declines during the period. The retail players under our coverage also recorded a decline in margins, due to higher advertising expenses, and adverse repricing strategies during the reimplementation of the SST. We believe that the shift in spending towards larger ticket items such as automotives and large electronic items dampened retail sales during this period.

Consumer Sentiment Still in Optimistic Territory

Despite the disappointment, we believe the macroeconomic backdrop will still hold up moving forward. The MIER Consumer Sentiment Index remains in positive territory in 3Q18 at 107.5 points despite coming off its multi-year high of 132.9 pts in 2Q18. Moving into 2019, we believe that private consumption will continue to be supported by healthy expansion in income, steady employment, as well as consumer-friendly policies.

Maintain NEUTRAL Sector Rating

While we believe that a solid basis remains for improvement in sector earnings, underpinned by a favourable macroeconomic backdrop and consumer-friendly government policies, we maintain our NEUTRAL view on the sector as we believe these factors have been fairly priced in at current valuations. We continue to favour QL Resources for its growth prospects coupled with the defensive nature of its core businesses. Among the brewers, we flag Heineken and Carlsberg for their stable earnings outlook and decent dividend yields.

Source: Affin Hwang Research - 5 Dec 2018