The Consumer sector was one of the best performing sectors in the local market over the past two years as investors took harbour in the sector in the face of market uncertainties such as the long-delayed local general election and external economic worries. As a result, the Consumer Index (“CI”) has been trading at a premium to the FBM KLCI valuations since mid-2012. However, its course could now reverse. We believe the sector is likely to underperform going forward as the market may  for higher returns in light of reversals seen in bond yields.   We reckon that the sector’s valuation premium to the benchmark index is likely to normalise back to lower levels based on its historical trend. This is the main reason for downgrading the F&B sub-sector now from an OVERWEIGHT to NEUTRAL while maintaining our NEUTRAL calls on the retail and sin sub-sectors. However, we believe there are still selective opportunities, particularly those with high future earnings growth, which fits a “Sell The Leaders, Buy The Laggards” investment strategy. Our Top Pick is ASIABRN (OP; TP: RM3.95) and HAIO (OP; TP: RM3.00) for its strong earnings growth trajectory.

Retail sub-sector

We are maintaining our NEUTRAL rating on the Retail sub-sector and continue to be cautious on its earnings prospects. There are signs that consumers are being increasingly selective in their spending habits as well as the uncertainty surrounding the proposed GST and subsidy rationalisation programmes. As such, we anticipate pricing competitiveness and high marketing cost to continue to have a negative impact on the retail companies' earnings in general. Nevertheless, we have two OUTPERFORM calls, namely ASIABRN (TP: RM3.95) and HAIO (TP: RM3.00). We like ASIABRN for its exciting earnings prospects following the its recent acquisition of core brands Anakku and Audrey, and we believe that this under-researched retail play is ripe for a re-rating. Meanwhile, we are also positive on HAIO as we anticipate its MLM segment to deliver decent earnings growth via continuous efforts to enhance its product mix and expand new markets. On a less upbeat note, we have MARKET PERFORM calls on AEON (TP: RM16.40), AMWAY (TP: RM12.20), PADINI (TP: RM2.15) and PARKSON (TP: RM4.06) while we have downgraded  ENGKAH (TP: RM2.85)  to an UNDERPERFORM call, having recently revised its earnings lower to account for lower sales orders from the group's largest customer.

F&B sub-sector

We are downgrading the F&B sub-sector from an OVERWEIGHT to NEUTRAL due to: 1) the potential continuation of its rich valuations de-rating, 2) the likely absence of any earnings surprises, 3) appreciation of the USD against RM, resulting in the higher cost of imported raw materials. We foresee that there will be more inflationary pressures coming from the rationalisation of subsidies by the Government in the near future, which will potentially impact the sector. However, the consumption of staple products is anticipated to remain intact buoyed by a still resilient private consumption growth of 7.1% estimated for CY13. Our MARKET PERFORM calls here are NESTLE (TP: RM72.80), KIANJOO (TP: RM2.79) and  QL (TP: RM3.40). Meanwhile, we have UNDERPERFORM calls on  DLADY (TP: RM47.00) and OLDTOWN (TP: RM2.53). We have downgraded our NESTLE call from OUTPERFORM to MARKET PERFORM while TP was downgraded from RM73.30 to RM72.80; this was mainly due to a 7% increase in share price since post election and while we anticipate a potential de-rating in consumer stocks. The Fwd PER was fine-tuned from 29.2x to 29.0x due mainly to realignment of + 2SD-level. 

Sin sub-sector

Tobacco – Maintain NEUTRAL but with lower TP.  We believe that the outlook for the sector has become increasingly challenging, compounded by factors such as: 1) a potential increase in excise duty, 2) more stringent regulations by the government to curb smoking, 3) the lingering effect of the 30 sen price hike in June, which could fuel the growth in illicit trades at the expense of the industry sales. Given the reasons above, we are adopting a more cautious view on BAT's valuations. We have rolled over BAT's valuation to FY14 while slashing its PER SD valuation by 2 notches (from +3 SD to + 1SD of its 5-year average PER). The net effect gave us a new low target price of RM61.36 and a lower PER valuation of 20x FY14 EPS from 24x previously. We have a MARKET PERFORM call on BAT (TP: RM61.36).

Brewery - Maintain NEUTRAL recommendation given the uninspiring outlook for the consumer sector due to the possible implementation of GST coupled with a possible excise duty hike, which could dampen the Malt Liquor Market volume growth. Although we are keeping our UNDERPERFORM recommendation on GAB (TP: RM18.20) due to its limited yield, we are upgrading our call on CARLSBG (TP: RM15.53) to a MARKET PERFORM from an UNDERPERFORM given that it is still providing a positive total return of around 4 %.

Source: Kenanga