Successive economic stimulus and lower funding costs have prompted us to revisit our valuation metrics, notwithstanding a plunge in 2020 earnings. We upgrade Nestle (TP: RM134.00), Aeon (TP: RM1.05) and Heineken (TP: RM21.30) to HOLD while we maintain our BUY ratings for QL Resources (TP: RM10.30) and Ajinomoto (TP: RM17.00) at higher TPs. Going into 2H20, our preference is still for the staple food producers whilst we retain our cautious stance on retail, tobacco and brewery counters given lingering uncertainties in the absence of an effective vaccine that may hamper growth well into 2021, in our view.

PENJANA Lifts Total Stimulus to RM295bn

Following the latest RM35bn PENJANA stimulus, total economic stimulus packages now amount to the tune of RM295bn, of which c.RM13bn is in the form of direct cash assistance (excluding other broad-based incentives). We believe this augurs well in supporting overall consumer spending, but more so on essential goods and staple food items.

2020 a Washout; Projecting Earnings Growth of 13% for 2021

We expect the impact from Covid-19 to set aggregate core earnings back by -14.3% for 2020, based on our estimates. Most stocks under our coverage are expected to succumb to an earnings decline, with the sole exception of QL Resources, where we expect a modest growth of 5.4% yoy for 2020E. For 2021E, we project sector core earnings to recover by c.13%, led by large-cap staples such as Nestle, PPB and QL Resources. While a rebound off a low base is also likely imminent for retailers, tobacco and brewery sub-sectors, we envisage a rather protracted recovery as uncertainties still linger in the absence of an effective vaccine. Hence, a return to 2019’s profitability level (or higher) may not materialise until 2022E, in our view.

Upgrading TPs; But Staying Selective

Notwithstanding a slide in 2020 earnings, we expect: i) ample liquidity owing to successive economic stimulus, ii) lower funding costs from OPR cuts and iii) increased appetite for stocks with a strong track record to remain supportive of valuations. After revisiting our valuation metrics, we upgrade Nestle (TP: RM134.00), Aeon (TP: RM1.05) and Heineken (TP: RM21.30) to HOLD (from Sell). Adding to that, we maintain our BUY ratings, but raise the target prices for both QL Resources (TP: RM10.30) and Ajinomoto (TP: RM17.00). Overall, we remain in favour of staple food producers going into 2H20 but are keeping our cautious stance on retail, tobacco and brewery counters. Maintain NEUTRAL on the sector. Top pick is QL Resources.

Source: Affin Hwang Research - 15 Jun 2020