A start of an end? The round of results in 4QCY15 was inconclusive to the health of the consumer sector with 50% or 5 out of 10 stocks under or coverage reported disappointing results, including DLADY, OLDTOWN, AEON, AMWAY, and PARKSON. While almost all of the companies except OLDTOWN recorded YoY sales growth as compared to the same period last year, earnings were somehow dragged down by higher promotional or distribution expenses incurred in order to stimulate consumer sentiment or consolidate market position. As such, we believe that the sector has started to show glimpse of recovery, but we think that only a consistent growth trend will convince us in giving a firmer conclusion.

A change in appetite. The KL Consumer Index (KLCSU) has performed up to par with the local benchmark index (KLCI) with YTD gain of 0.5% vis-à-vis 0.7% of the latter. While the recently concluded 4QCY15 results failed to send out a strong message on the clear direction of the sector, we believe investors were still wary and cautious of the weak consumer sentiment, resulting in flattish performance of KLCSU and only more consistent and stronger sets of results moving forward can bring clarity on whether a recovery is on the fast track. We also noticed that there was a switch in preference as blue-chip companies with larger market capitalisation are back on investors’ radar with names, including PPB, CARLSBG, DLADY, F&N, and GAB making YTD gains ranging from 6.2% to 17.4% while some profit-taking activities on the second-liners are observed, resulting in more modest performance by the companies with smaller market capitalization.

Big price increase unlikely. The Anti-Profiteering Act, which was introduced to prevent traders from raising prices by taking advantage of GST implementation, will be expiring on June 2016 after an implementation period of 18 months. While businesses will regain the freedom and flexibility to adjust selling prices, we are not anticipating a big round of price increase in view of the all-time low consumer sentiment which induced higher sensitivity of consumer towards pricing and thus stronger consumerism. Secondly, we also expect the authorities to continue keeping a close watch on the prices, particularly key necessities items even after the expiry of the Act to ensure price stability. Besides, none of the companies under our coverage has openly indicated the intention to raise prices upon the expiry of the Act as most of them are cautious of the weak consumer sentiment and competitive business landscape.

Sentiment has not sunk further? According to MIER (Malaysian Institute of Economic Research), the consumer sentiment deteriorated further after slumping to a 10-year low in 3Q15 with 4Q15 Consumer Sentiment Index dipping to 63.8 in 4Q15 from 70.2 in 3Q15. However, the picture was comparatively rosier according to Nielsen as its benchmark index inched up by 2 ppt to 80% in 4Q15. Nonetheless, as we have not spotted any strong indicators or clues to prove that the sentiment has recovered significantly, but we believe that the sentiment has gradually normalize post-GST implementation one year ago, although issues over the uncertainties in economy outlook and job security are still creating uneasiness in consumers. During 4Q15, 75% or 9 out of 12 companies under our coverage have recorded YoY growth in revenue (refer to table below). We think that the trend is healthy and supportive of our thesis that the consumer sentiment has not sunk further as price increases are unlikely the factor driving the revenue growth due to the Anti-Profiteering Act.

Source: Kenanga Research - 6 Apr 2016