We reiterate our NEUTRAL call on the consumer sector. The outlook of retail and MLM subsectors in the discretionary segment might still remain cautious and challenging considering the deteriorating weak consumer sentiment, but the staple food/F&B subsector is expected to continue its solid earnings growth momentum thanks to the resilient and non-discretionary nature as well as being aided by the strengthening USD (for net exporters) and the subdued trend in global commodity market. Macro environment is still supportive and we are anticipating a neutral-to-consumer-friendly Budget 2016 in October. We adopt the same strategy to focus on the small-mid cap F&B stocks. Our top pick for the sector is PWROOT (TB; FV:RM2.58), due to its exports exposure, normalization of marketing expenses and generous dividend pay-out that offers attractive yield of c.5%. We also maintain our NEUTRAL rating on the sin sector. We think that the recovery and normalization in volume growth might be relatively quicker due to the addictive nature as well as the aggressive marketing campaigns to stimulate consumption. On the flipside, the lack of organic volume growth and the difficulties in raising prices due to anti-profiteering laws are the negative factors in the sector. Our top pick for the sector is GAB (OP; RM15.36) as we like its market-leading position in the local Malt Liquor Market, while the strategy of focusing on premium segment by embarking on aggressive marketing activities will help to sustain earnings growth.

GST and weak sentiment weighed. As expected, the retail/MLM subsectors reacted worse than the F&B and sin sector with 4 out of 7 companies under our coverage reporting disappointing results. Besides, the implementation of GST has also encouraged certain amount of pre-stocking activities that resulted in huge swing between 1Q15 and 2Q15 sales. Elsewhere, the F&B subsector stayed resilient despite the negative headwinds and the industry, aided by easing raw material prices as well as strengthening of USD thanks to their export exposure. As for the sin sector, it was observed recording slower sales growth but still relatively less vulnerable to the weak consumer sentiment compared to the retail/MLM companies.

Consumer sector showing resilience. While KLCI has slumped to a YTD loss of 8.3%, the KL Consumer Index (KLCSU) has reflected the resilient nature of the consumer sector with YTD gain of 2.4% as at our cut-off date of 25 Sept 2015. It is interesting to note that the index laggards comprise of big-name automotive players, including UMW (- 25.9%) and TCHONG (24.9%) probably due to the slowing car sales and depreciation of local currency, while retail-related companies, including ASIABRN (-51.2%), ZHULIAN (-29.4%) and BONIA (-17.8%) are believed to have fallen prey to soft consumer sentiment and GST implementation. However, the weakness was more than offset by strong performance of companies with export exposure from the food and garment manufacturing industry, furniture manufacturers as well as the defensive healthcare industry (refer to table below), which can be largely attributed to the sharp rise in USD against MYR.

Source: Kenanga Research - 7 Oct 2015