The start of 2020 has been turbulent, starting with the outbreak of Covid-19 followed by an unexpected change in the Malaysian government. Nonetheless, we expect incentives announced earlier under Budget 2020 and the recent RM20bn financial stimulus to remain intact, and thereby sustain spending on essential goods. Thus, we broadly favour the staple producers over retailers. We project sector 2020E core EPS growth of 4.4% yoy, mainly driven by large-cap staples (Nestle & QL). We maintain our sector NEUTRAL rating, and our sector top pick remains QL Resources.

2019 Review: 7 of 11 Companies Met Expectations

The consumer sector aggregate core earnings rose 8.8% yoy in 4Q19, largely lifted by better performance from PPB and BAT. PPB’s earnings were boosted by higher contribution from grains & agribusiness while BAT saw a higher seasonal volume sales trend over the period. Seven of the 11 companies posted results that were broadly in line with expectations.

Favouring Staple Names Amidst Market Volatility

2020 is set to be a challenging year amidst the outbreak of Covid-19 which will likely stretch beyond 1Q20. The recent change in government also raises potential policy risks over the near term. Nevertheless, we do not expect any drastic changes to the cash assistance and broad-based incentives announced earlier under Budget 2020 and the recent RM20bn financial stimulus package; this should keep consumer spending afloat especially amongst the lower-income group. As such, we broadly continue to favour the staple producers over the retailers.

Projecting An Overall Core EPS Growth of 4.4% for 2020E

In tandem with Affin’s 2020E GDP growth downgrade to 4.0% (from 4.5%), we had lowered our overall sector earnings forecast by c.9ppt in the recent results season. Post-revision, we project overall sector EPS to recover by 4.4% yoy for 2020, subsequent to the 6.5% yoy contraction in 2019. We expect 2020 growth to be led mainly by large-cap staples such as Nestle and QL in addition to MSM turning around to a core profit in 2020.

Maintain NEUTRAL Sector Rating

Overall, we believe the consumer sector forward PER of 29x (+1SD above 5-year mean) remains rich but sustainable given its resilient earnings delivery and decent dividend yields. As such, we remain NEUTRAL on the consumer sector. Our sector top pick remains QL Resources (12M SOTPderived TP of RM9.30), given its robust long-term earnings prospects, and the growing Family Mart operation that is likely to contribute more meaningfully to group earnings. Our other BUY calls within the consumer space are Ajinomoto, Heineken and Perak Transit.

Source: Affin Hwang Research - 6 Mar 2020