Our concern remains that the proposed GST and subsidy rationalization program (which are likely to be among the key topics discussed in the Budget 2014) could introduce further cost inflationary pressures that would compress margins. Should the companies under our coverage fail to shore up margins in seasonally stronger 2H13, we may have to downgrade the consumer sector from our current NEUTRAL rating. The subsector that is most at risks is the retailers such as PADINI and ENGKAH. Having said that, we see selective stocks that may in fact benefit from a higher cost inflationary environment, namely the MLM companies such as AMWAY, HAIO and ZHULIAN. Consequently, ZHULIAN is our top pick for 4Q13, which we like for its double digit earnings growth of 11-15% vs its peer average of 9%, minimal impact from GST implementation as well as its regional expansion plans in countries such as Thailand and Indonesia. Though the operating environment has remained challenging particularly for the consumer discretionary retail stocks, we see various efforts being made to drive sales and contain operating costs which could benefit earnings in the coming quarters, although we reckon it will not significantly be far-off from our estimates unless there are new acquisitions or inorganic growth factors.

F&B sub-sector

We reaffirm our NEUTRAL rating on the F&B sub-sector as we see limited upside to target prices for now. We expect inflationary pressures to stem from not just the GST, but also the government subsidy rationalization program which could impact the prices of imports and raw materials (taxed at the standard rate). At the same time, increases in the prices for energy items could also have a spill-over effect on not just company earnings, but also company’s revenues as consumers’ disposable incomes erode. This comes on the backdrop of: (i) potential continuation of its rich valuations de-rating, (ii) absence of any earnings surprises, and (iii) appreciation of the USD/MYR. We had recently upgraded KIANJOO (TP: RM3.16) to an OUTPERFORM call, after a lower price assumption for tin and aluminium led to higher expected earnings. Meanwhile, we have 3 MARKET PERFORM calls which include NESTLE (TP: RM72.80), OLDTOWN (TP: RM2.53) and QL (TP: RM3.74) and an UNDERPERFORM call on DLADY (TP: RM47.00).

Retail sub-sector

We are NEUTRAL on the Retail sub-sector and continue to be cautious on its earnings prospects. While the 4Q13 would see more outlet expansions, most industry players are still cautious on their outlook and prospects for the quarters ahead. This comes amid signs that the selective spending habits of consumers have become the new paradigm. Nevertheless, we favour MLM companies which amid a challenging retail environment would attract more participation by the low-middle income group. We anticipate the MLM segment to deliver decent earnings growth in addition to the high dividend yields of >5%. Also, our top pick is ZHULIAN (TP: RM4.30). We are also positive on HAIO (TP: RM3.00) and ASIABRN (TP: RM3.95), all 3 of which we have OUTPERFORM calls. On a less upbeat note, we have MARKET PERFORM calls on AEON (TP: RM14.76), AMWAY (TP: RM12.20), PADINI (TP: RM1.70) and PARKSON (TP: RM3.36) and an UNDERPERFORM call on ENGKAH (TP: RM2.28).

Sin sub-sector

Tobacco – Maintain NEUTRAL. Post excise duty hike of 14%, BAT has increased the selling prices of its cigarettes by ~RM1.50 per box of 20s for both the premium (RM12) and value-for-money (RM10.50) brands. Rival JTI has also increased their prices by a similar quantum a day later, and we expect Phillip Morris to follow suit fairly soon. Our analysis shows that while TIV for the legal market may suffer, the increase in selling prices would be more than sufficient to counteract the loss of volume. Even so, we believe that the outlook for the tobacco industry remains challenging owing to factors such as (i) more stringent regulations by government to curb smoking, (ii) gradual shrinkage of the legal market volumes, and (iii) high incidences of illicit trade which compete with the legal market. Given the reasons above, we maintain our MARKET PERFORM rating on BAT (TP: RM63.00).

Brewery - Maintain NEUTRAL recommendation. The Malaysian government typically increase the

excise duties for brewers in tandem with the tobacco industry. Given the absence of an excise hike for brewers recently as well as the prospect of Visit Malaysia year being just around the corner, we no longer anticipate an excise duty hike this year. Nevertheless, the prospects for the brewery segment remains uninspiring due to the potential implementation of GST which could dampen the Malt liquor market volume growth. We are maintaining our NEUTRAL recommendation on the sector due to a sluggish growth on the Malt Liquor Market coupled with lofty valuations and less attractive yields. Currently, we have an UNDERPERFORM call on GAB (TP: RM16.52) and a MARKET PERFORM call on CARLSBG (TP: RM13.36). \

Source: Kenanga