The consumer sector registered a decent 5% yoy core earnings growth in 1Q19, driven by sturdy private consumption growth and higher retail sales in spite of the weaker consumer sentiment. For the rest of 2019, we maintain our positive view as macro and business conditions remain sound, while favouring companies thriving within the F&B space. Given that sector valuations remain rich at ~30x forward PER, however, we maintain our NEUTRAL call. Our top sector pick is QL Resources with a target price (TP) of RM8.

Q1 Results Largely Within Expectations

Revenue and core net profit both grew by 5% yoy in 1Q19, mainly driven by large-cap names such as Nestle, PPB and QL as well as the brewers Carlsberg and Heineken. The retail industry’s sales as reported by RGM also grew 3.8% yoy which bettered the 3.1% expectation in 1Q19. This was reflected by Aeon’s robust retail sales performance during the quarter.

Underlying Conditions Remain Sound

While the sector’s top-line growth also met our expectations, the results were disconnected from the further decline in the MIER Consumer Sentiment Index to 85.6pts. Moving forward, we expect the low-inflation environment and supportive macroeconomic fundamentals to continue spurring local consumption.

Market Research Data Suggests Shifting Business Trends

From market research data on the retail and e-commerce markets, we observe some underlying shifts in business trends: (i) E-commerce is more likely to benefit F&B players and pressure fashion retailers; (ii) convenience store players are benefitting from shifting consumer preferences favouring their operating models; and (iii) direct selling market could be plateauing. As a whole, local retail sales have been rising smoothly, recording a decent CAGR of 4% from 2013-2018 and is expected to grow at a comparable pace over 2018-2023.

Maintain NEUTRAL

As positive prospects for the sector are largely priced in, we maintain our NEUTRAL call on the sector and stay selective on quality names with good growth prospects. Our top pick remains QL Resources for its defensive core businesses and sustainable earnings momentum. For yield plays with a stable business outlook, we flag Heineken and Carlsberg.

Source: Affin Hwang Research - 20 Jun 2019