We maintain our NEUTRAL call on the consumer sector despite the slump in consumer sentiment sliding into a multi-year’s low as we think that the sentiment moving forward may recover in conjunction with the festive season and holidays as well as the behaviour normalization by the consumers three quarter post-GST implementation. We opine that the commodity market will stay subdued, assuming ample supply and slowing global demand while exporters will continue to enjoy the advantage of the weak local currency. Our top pick of the sector is OLDTOWN (OP: RM1.76), as we view it as a viable laggard play in the premium F&B sector, currently trading close to -1.5 SD over the 3-year’s mean. We reiterate our NEUTRAL rating on the sin sector with more negative bias. The latest round of excise duty hike introduced in the tobacco sector might significantly hurt the legal tobacco industry by accelerating the pace of the industry volume decline. Besides, we are also wary of further increases in excise duty, particularly in the brewery sector, which has been spared from excise duty hike for 10 years (last increase in 2005).

Mixed performance. It was a fine 3Q15 for the F&B stocks with all of stocks under our coverage reported earnings within expectations, while DLADY beat our estimates, having able to improve its earnings margin following the weakness in milk powder price. However, the retail sector continued to be undermined by poor consumer sentiment as a result of a weakening Ringgit and GST implementation. Of our 7 retail/MLM companies, 4 came in below expectation while PADINI recorded results better than our expectation by garnering higher sales from new store openings.

Steady despite sentiments dampener. Up to our cut-off date of 23rd December 2015, the KL Consumer Index (KLCSU) recorded YTD gain of 4.2% vis-à-vis the 5.5% decline registered by the benchmark index, FBMKLCI. Notable index movers include PPB, QL and DLADY which were the beneficiaries of the drop in commodities prices while index laggards were BAT and UMW, the former due to massive hike in excise duty while the latter suffered from declining car sales. In a nutshell, the consumer sector in general still performed better than the broader market despite the challenges of GST implementation and weak consumer sentiment throughout the year thanks mainly to the saving grace in the softer commodities prices as well as the weakened MYR which benefited exporters.

Sentiment bottomed? Two quarters post-GST implementation, consumer sentiment slumped to a 10-year’s low in 3Q15 with MIER (Malaysian Institute of Economic Research) Consumer Sentiment Index deteriorating further by 2.1% to 70.2 from 71.7 in 2Q15. While the weakness in consumer sentiment was in line with our initial expectation where consumers will require 6-9 months to adapt to the new costing environment, the magnitude of the dip was worrying as the index collapsed beyond the low that was recorded during global financial crisis back in 2008. We reckon that the sharp depreciation of MYR coupled with the weakness in crude oil prices and global economy slowdown had created more uncertainties and thus the loss of consumer confidence, on top of the GST implementation. Moving forward, we think that the year-end festivities and school holidays can help to spur or lift consumer spending, thus the slump in consumer sentiment may bottom out, further aided by the normalization or acclimatization of consumer behaviour three quarters after GST implementation. 

Source: Kenanga Research - 7 Jan 2016