We believe consumer retail stocks will continue to be an excellent defensive play against any economic uncertainties. Moreover, retailers saw sales rising by 12.1% in 1Q12 while the Retail Group Malaysia also anticipates retail sales to register double digit growth of 10% for 2012. Meanwhile, we expect 3Q12 retail sales to be better on the back of the festival season falling in the months of July and August. However, we are cautious on the regional players as the slowdown of their retail operations in the other regions, especially in China, would likely drag down the performance of the whole group. Due to the defensive nature of the sector given its high dividend yield, we are maintaining our OVERWEIGHT call on the Consumer Retail sector, which provides a dividend yield higher than the overall consumer product index (4.1% yield) and the FBM KLCI index (3.6% yield). Given the sustainable growth rate for retail sales and private consumption, we continue to have OUTPERFORM calls on AMWAY (M) (TP: RM11.65), ENGKAH (TP: RM4.05) and PARKSON (TP: RM 5.44). We are retaining our MARKET PERFORM call on AEON (TP: RM9.68).

Leveraging on rural areas. We observe that interests in the Malaysian suburbs has been increasing, tagging along to the development of residential and commercial properties in rural areas, which are still undiscovered by the retail sector. The sector will be leveraging on this untapped market to serve the growing Malaysian population (average growth rate per annum of 2%), particularly for companies like  AEON (MP; TP: RM9.68),  as well as, catering for increasing tourist arrivals. AEON has opened one outlet in Ipoh recently (March 2012), and is expecting another one in Seri Manjung, Perak by the end of this year.  

The Malaysian Retail Association (MRA) is projecting a 6% growth this year. In 2011, Malaysian retailers sold RM83.2b worth of items ranging from clothing to jewelleries and food souvenirs with a sales growth rate of 8.1%, which was higher than its earlier anticipated 6.5% growth. Although the retail sales growth for 2012 is anticipated at 6% by the MRA, retailers actually saw a much higher sales rate of  12.1% in 1Q12, which is higher than the 11.5% growth in 4Q11. Retail Group Malaysia actually expects retail sales to likely grow 10% higher for the year. Therefore, we also like PARKSON (OP; TP: RM 5.44) for its domestic market, which we expect the domestic retail area to increase 10% (YoY) to about 366 k ft by 2013, including the massive on-going construction project in the urban fabric of KL Sentral; Nu Sentral.   

Sustainable private consumption. In tandem with MRA's projection, private spending is also expected to moderate to 6.8% this year as per  our in-house projection versus that of 6.9% last year. The moderation in growth could be due to the uncertainties of the global market. But we anticipate better private spending growth of 7.1% in 2013, with drivers like sustained 10MP spending and the implementation of ETP projects, which will boost domestic demand. The MIER consumer sentiment index is also positive, where the 1Q12 index saw a sustained YoY rise of 5.6%. This has also turned MIER's view much bullish with its 2012 growth forecast, which was upgraded from 3.7% to 4.2%, and being in line with our private consumption growth rate of 6.8%.

High yield from MLM.Meanwhile, MDTCC (Ministry of Domestic Trade, Co-operatives and Consumerism) expects direct selling to grow to RM10b by 2015. On a straight line basis, this would translate to an estimated 10% growth for this year from RM6.5b in FY10, which is higher than our more conservative projection of a 6.2% sales growth in FY12 for AMWAY (M) (OP; TP: RM11.65).

Source: Kenanga