Commodity prices remain volatile and hence companies with high exposure to commodities will likely continue to face challenging times ahead to maintain their profit margins such as flour millers and poultry players. That said, the recent 'people-friendly' Budget will continue to help spur consumer spending and eventually benefit the F&B players. This could potentially help to mitigate the anticipated higher raw material cost above. Given the current pre-election jitters, we are expecting the record high PER valuations of  stocks to take a breather for now (see our previous report on this dated 10/9/2012). Nevertheless, we expect the correction in the consumer stocks share prices  to be mild only compared to others in the market due to 1) the defensiveness of these stocks, 2) continuous news flows of corporate activities and 3) continued strong interests from local and foreign institutional investors for consumer plays. Hence, on balance, we are maintaining our NEUTRAL call on the overall consumer F&B sector. We advocate an 'accumulate' strategy for these consumer stocks if  their share prices correct as expected, especially on those that we see with value emerging and high dividend yield. Hence, we continue to have OUTPERFORM calls  on QL Resources (TP: RM3.68), Kian Joo (TP: RM3.00), Oldtown (TP: RM2.26), Nestle (TP: RM67.50), and Cuscapi (TP: RM0.41). Meanwhile, for the other consumer stocks, we are retaining our MARKET PERFORM calls on BAT (TP: RM58.70), DLady (TP: RM44.60) and GW Plastics (TP: RM0.92)

Accumulate positions on expected weakness. F&B consumer stocks have gone through a rerating phase with some stocks under our coverage having appreciated by more than 100%. Given the current pre-election jitters and also the relatively high PER valuations and dividend yield compressions of these consumer stocks as mentioned in our previous sector report dated 10/9/2012, we reckon that the rallies in these stocks could take a breather in the coming months. However, we believe that the corrections will be mild due to 1) the defensiveness of these stocks, 2) continuous news flows of corporate activities and 3) continued strong interests from local and foreign institutional investors for consumer plays. As a result, we recommend a 'buy on weakness' strategy for investors here to build up their portfolio position in the sector for the long run, especially on stocks like DLady (MARKET PERFORM; TP: RM44.60), Nestle (OUTPERFORM; TP: RM67.50) and Oldtown (OUTPERFORM; TP: RM2.26). 

Challenging times ahead. World commodities prices continue to experience volatility, especially in corn, soybean and wheat prices. Due to the adverse weather conditions, speculations of supply shortages have caused soybean and wheat prices to surge by 31% (YTD) and 33% (YTD) respectively. However, we do not think the current condition is alarming as it is not comparable to the 2008 commodity boom, which led to a panic situation then. This is because the current commodity prices are still relatively far off below their 2008 levels, and many are still lower than even a year ago like sugar. Nevertheless, we still believe the volatility could potentially cause a temporary/minor margin compression for consumer companies, which may not be able to pass down some of the costs to the end consumers immediately.  The good news is that we have yet to see any material impacts so far to these companies, but investors should beware of stocks that have a high  exposure to commodities, nonetheless, such as flour millers, poultry players and so on.

Bonuses to boost spending. Looking at the 'people-friendly' Budget measures  that were announced last week, we anticipate the government's generous goodies distribution to the households and individuals, especially the lower-income class, will lift the overall consumer spending. This is evident from the fact that Malaysia's private consumption growth has been well supported this year by the last Budget despite the ongoing global economic slowdown. Thus, we believe that Budget 2013 will continue to enhance the people's welfare and increase the disposable household income as well. This could potentially drive consumer spending higher, benefiting the F&B players and helping them to offset their anticipated higher raw material costs.