Retail sector

Post 4QCY12, we are maintaining our NEUTRAL rating on the Retail Sector. The recent corporate earnings season produced a mixed bag of results for the retail stocks under our coverage, with Padini and Parkson falling well below both our estimates and the consensus numbers. Hai-O was the only stock to surpass our forecasts while the remaining three companies (namely Amway, Eng Kah and AEON) registered earnings, which were broadly in line with the street and our expectations. We note that most of the industry players have turned cautious on their outlook and prospect for the quarters ahead and this came amid signs of a progressive weakening in consumer spending. Consumers have also become generally more selective in their spending habit. As such, we anticipate that pricing competitiveness and higher marketing costs will have a further negative impact on the retail companies’ earnings in general. We had earlier revised down the earnings of Padini, Parkson and Eng Kah while maintaining the earnings for Amway and increased our earnings estimates for AEON and Hai-O. Given the higher uncertainties from all the factors mentioned above, we are maintaining our NEUTRAL call on the RETAIL sector. Note that we have just one UTPERFORM call on Hai-O (TP: RM2.90). MARKET PERFORM calls include Amway (TP: RM11.68), Eng Kah (TP: RM3.63), Padini (TP: RM1.84) Parkson (TP: RM4.88) and AEON (TP: RM14.14), at this juncture.

F&B sector

On the overall, F&B consumer stocks under our coverage have reported earnings to date that are mostly in line with our earnings estimates. We foresee the outlook for F&B consumer stocks to remain challenging with the likelihood of further margin compressions, which we have not factored into our earnings models as it is difficult to estimate their timing and quantum. The reasons for the margin compression are mainly due to the potential: 1) continuous appreciation of USD against RM, 2) increase in wages due to the implementation of the minimum wages policy and 3) higher spending from the rise in marketing activities. We may cut the target prices of the big F&B capitalisation stocks by half a notch in the near future from a +3SD to a +2.5 SD from the mean if the consumer stocks momentum slows down after the 13th General Election. This is mainly because of their flattish earnings and regular dividend payouts will not have enough sparks to enthral under a “high beta world” after the GE. Nevertheless, we are maintaining an OVERWEIGHT rating on the sector for now and our OUTPERFORM calls on Nestle (TP: RM73.30), Kian Joo (TP: RM2.79) and QL Resources (TP: RM3.40). Meanwhile, we are retaining our MARKET PERFORM calls on DLady (TP: RM47.00) and OLDTOWN (TP: RM2.38).

Sin sector

We like the brewers for their defensive earnings and organic growth. To recap, the recent earnings for brewers came in well within expectations, underpinned by the marginal growth of the malt liquor market and a better product mix, which contributed to the better margins achieved. However, given the dividend yield compression from the range of 4%-5% to 3%-4% due to the recent run-up in share prices in the sector, we deem the sector to be less attractive at this juncture. Meanwhile, we remain cautiously optimistic on the tobacco sector and have a MARKET PERFORM call on BAT (TP: RM 68.40) as it has a much more convincing outlook than JTI (Not Rated) as the former also manufactures for other regional markets, which could help it mitigate its domestic exposure risk. Hence, we are maintaining our NEUTRAL view on the sector.

Source: Kenanga