• 2Q20 saw 7 of the 11 companies under coverage post results that were above expectations, mostly from the F&B sub-sector on generally betterthan-expected sales volumes and cost containment.
• While economic headwinds have yet to fully subside, the upcoming Budget 2021 & year-end festive spending may provide added support to close the year while a gradual recovery should continue into 2021 in the lead-up to the anticipated mass availability of a Covid-19 vaccine.
• Maintain NEUTRAL sector rating. Our top pick is QL Resources (TP RM10.70), and we also have BUY ratings on Ajinomoto (TP RM18.60) and Aeon Co (TP RM1.00).

2Q20: 7 of 11 companies tracked ahead of expectations

Notwithstanding the MCO-hit quarter, 7 of the 11 companies under coverage reported better-than-expected results. Broadly, the earnings beat came from companies in the F&B sub-segment with QL & PPB leading the way; the former saw an increased sales volume in the marine product segment while the latter's earnings soared 70% yoy driven by its associate Wilmar, agribusiness and consumer products. The brewers (Carlsberg & Heineken) had a disappointing quarter as both were severely affected by lockdown disruptions.

Near-term headwinds remain, expect modest recovery in 2021

We believe that consumption activities can be sustained at c.80% of pre-Covid levels for the remainder of the year, taking a leaf from countries that entered the Covid-19 curve earlier. Near term, we see consumer sentiment getting some support from: i) the upcoming Budget 2021, ii) year-end festive spending and iii) the EPF withdrawal facility scheduled until 31 March 2021. A modest recovery should persist heading into 2021 (Affin’s private consumption growth forecast for 2021 at 5.5%), in the lead-up to the availability of a Covid-19 vaccine by 1H21, in our view.

Maintain NEUTRAL sector rating

The impact from the pandemic will likely pull 2020 sector earnings back by 9.3%, based on our estimates, revised from our earlier projection of -14.3%, given our earnings forecast upgrades after the 2Q20 results. For 2021, we expect recovery across the board for an aggregate core net profit growth of 12.6% yoy. We stick with QL Resources (TP: RM10.70) as our sector top pick, on its ability to weather the economic downturn and given its long-term growth prospects. We also have BUY ratings for Ajinomoto (TP: RM18.60) and Aeon Co (TP: RM1.00). Overall, the consumer sector forward PER of 29x (+1SD above 5-year mean) remains rich but is likely sustainable, in part driven by resilient earnings delivery by food producers, and the anticipated sector earnings rebound in 2021.

Source: Affin Hwang Research - 8 Sept 2020