The Ministry of Domestic Trade, Cooperatives and Consumerism (MDTCC) issued a federal gazette on the enforcement of the Trade Descriptions (Cheap Sale Price) (Amendment) Regulations 2016. The new regulation (effective on 1st January 2017), dictates that the reduction in special sales allowed to four times a year from five times, previously. Three of the four special sales would be determined by the Ministry, while the other would be at the trader’s discretion. The new regulations, however, do not apply to conditional sales of purchase with purchase (PWP), coupons, discount vouchers and retail membership cardholders. Although competition is expected to intensify owing to a narrower window of cheap sales opportunities for traders to compete for a shrinking market share, we maintain our views certain retail players are able to conduct more aggressive member exclusive sales as an alternative to the said cheap sales while MLM players are focused on distributor sales rather than retail sales. Hence, we reiterate our NEUTRAL view on the sector. Furthermore, the challenging outlook for 2017 could be mitigated by the resilient and defensive nature of the sector, supported by the healthy private consumption. Our top picks remain on elected F&B players, being HEIM (OP, TP: RM18.48), PWROOT (TB, TP: RM2.56) and OLDTOWN (OP; RM2.11).

Trade Descriptions (Cheap Sale Price) (Amendment) Regulations 2016. In a federal gazette by the Ministry of Domestic Trade, Co-operatives and Consumerism, (MDTCC), the new Trade Descriptions (Cheap Sale Price) (Amendment) Regulations 2016 was enforced on 1st January 2017. This would succeed the Trade Descriptions (Cheap Sale Price) (Amendment) Regulations 2015, which was made as part of the government’s initiative to ensure that sales are conducted in a more efficient and effective manner. The implementation of the amendment would reduce the number of special sales allowed to partake by traders to four times a year from five times, previously. Three of the four special sales will be determined by the Ministry, while the other will be at the trader’s discretion. The three sales fixed for this year are the 1Malaysia Super Sale (March 1 to 30), 1Malaysia Mega Sale Carnival (June 5 to Aug 31) and the 1Malaysia Year-End Sale (Nov 1 to Dec 31). The new regulations, includes several restrictions for discounting, primarily, the base price set for items before discount must be based on the lowest price of the respective product over a three-month period before the sales. Adding to this, the offered discount must not be lower than 10.0% and retailers are required to display at least 50.0% of their goods for discount during the cheap sales (previously, 70.0% for discount display). The new regulations, however, do not apply to the conditional sale of purchase with purchase (PWP), coupons, discount vouchers and retail membership cardholders.

Two sides of the coin. Typically, special sales provide retailers a chance to clear obsolete stocks at below than market prices at different timeframes based on the product life cycle. With the streamlining of special sales timeframe by the ministry, retailers may be at a difficulty to clear the stock within their own discretion and may lose out on opportunities to conduct sales during certain strategic periods (i.e. festive seasons). Though the market could negatively react with a decline in general demand, we believe there could be improvements in operating margins as fewer sales events may lead to a reduction in promotional costs by the retail players. Furthermore, the streamlining of the special sales may be beneficial for consumers in the long-run as consumers are able to plan out their spending during these pre-determined cheap sales periods.

We reiterate our NEUTRAL rating on the sector. Although competition is expected to intensify owing to the narrower window of cheap sales opportunities for traders to compete for a shrinking market share, we believe major retailers such as AEON (UP, TP: RM2.06) and PARKSON (UP, TP: RM0.66) will not likely to be significantly affected by the regulatory changes as these retailers have the alternative to exercise more aggressive sales and promotional incentives in the form of members privileged days (i.e. member exclusive sales). In addition, Multi-level Marketing businesses such as AMWAY (MP, TP: RM8.04) and HAIO (MP, TP: RM4.03)’s promotions are generally focused on their distributors instead of retail sales. That being said, we maintain our view on a challenging 2017 as consumer sentiment is likely to stay subdued in 2017 in view of the continuing concerns on the state of economy, job market as well as rising cost of living. Meanwhile, the cost advantage enjoyed by F&B players from the soft commodity market is diminishing, further aggravated by the weak local currency. On the flipside, we have not turned bearish on the sector as we believe it is resilient and defensive enough, supported by the healthy private consumption, further evidenced by the recovery in sentiment from the low in end-2015.

Our sector Top Picks remains unchanged. We favour HEIM (OP, TP: RM18.48) for its market-leading position against its peer, CARLSBG (MP, TP: RM14.30), which puts the company in a firm position in the event of a price increase for its products, given the sticky demand of its goods. We also like PWROOT (TB, TP: RM2.56) given its steady growth with proven track records, sturdy balance sheet and attractive dividend yield at 5.4%. The resilient nature of FMCG products and robust export sales will be able to drive top-line growth while margins are expected to be stable. Lastly, we see investment opportunity in

OLDTOWN (OP; RM2.11) as we believe the share price weakness following the recent sell-down arising from its exit from the Shariah-compliant status had been overplayed. Furthermore, the group’s strong fundamentals are still intact, especially the visible earnings growth prospect in its Manufacturing of Beverages business segment.

Source: Kenanga Research - 10 Feb 2017