We reiterate our NEUTRAL rating on the consumer sector. Although consumer sentiment readings continue to trail at highly pessimistic levels, the recent uptick in numbers could be an indication of a turnaround in the market’s perception towards the pricing of goods and individual consumers’ financial stability. Corporates may also experience a favourable shift in results as cheaper commodity prices should provide F&B players some relief in the medium-term as average inventory costs are progressively reduced. The earlier Hari Raya festivities could bring about seasonal gains for retailers but may dampen the performance of F&B players given the fasting month. Private consumption is expected to continue being resilient and public spending could be boosted by national events around the corner. However, further economic stimuli may still be needed to rejuvenate market strength back to its pre-GST times at favourable Ringgit levels. Hence, we prefer stocks with sizeable foreign operations and clientele as mitigation against the weak domestic environment while tapping into regions with sustainable growth. Our Top Picks for the sector are: (i) PARKSON (OP; TP: RM0.88) as we anticipate a turnaround from its operations in China; and (ii) the recently initiated PWROOT (OP; TP: RM2.95) which we like given their increasing export presence amidst a softer domestic market while also providing attractive dividend returns.

A negatively-biased mixed quarter with only 2 coverages (HAIO, NESTLE) reporting better-thanexpected results. 6 coverages (AEON, CARLSBG, HEIM, OLDTOWN, PADINI, PARKSON) performed within expectations while the 5 remaining stocks (AMWAY, BAT, DLADY, PWROOT, QL) underperformed. While we had hoped that seasonality would boost private consumption in 1QCY17 to generate stronger sales, the unwaveringly high forex rates at the beginning of the quarter could have possibly undermined consumers appetite for a stronger recovery in spending habits. At the meantime, higher commodity cost averages continued to drag earnings potential, which was even more impactful towards net importers.

Continuous momentum on industry index. The KL Consumer Index (KLCSU) continued to expand steadily while trend-hugging the benchmark KLCI’s YTD return, at 8.5% and 8.8%, respectively. Growth in the index was carried primarily by UMW with the upcoming disposal of its loss-making oil and gas arm. In addition, NESTLE also performed strongly with the announcement of upbeat quarterly earnings while PPB saw an increase in market interest arising from headwinds of Wilmar’s potential China restructuring and listing. We believe investors could be more active in the market as the local currency appears to be regaining strength alongside commodities prices that seemingly have settled at stable levels.

Sustainable uptick in sentiment? 1Q17’s consumer sentiment index by the Malaysian Institute of Economic Research (MIER) recorded at 76.6 pts (+6.8pts QoQ). The rebound in sentiment could be attributed by improved perception over rising living expenses alongside better job and financial stability. Furthermore, consumer confidence could be stimulated by spending driven by the disbursement of private benefits, usually undertaken during the first quarter for the year. While 2Q17 numbers may be supported by Hari Raya festivities, going forward, we believe further boost could be seen during 2H17 with the influx of public spending from major national events (i.e. 29th SEA games, 60th Independence Day Celebration).

Source: Kenanga Research - 6 Jul 2017