We reiterate our NEUTRAL rating on the consumer sector. 2019 is turning out to be a challenging year with the adoption of new policies, which may put some pressure on consumer spending. Nevertheless, recurring festivities (i.e. Chinese New Year in 1QCY19, and Hari Raya Aidilfitri in 2QCY19), could help spur demand for discretionary items, and in turn benefit F&B players and Retailers, but the absence of major sporting events this year means less impulse-driven consumption. MYR is showing signs of recovery, which could lessen the burden for importers but may affect net exporters. In the near-term, we continue to expect consumer stocks to outperform the benchmark KLCI for their more resilient nature and milder reaction to global developments. For 2Q19, we choose PADINI (OP; TP: RM4.25) as the top pick for the sector as its resilient business model focused on value-for-money segment will likely fare better during this challenging year. We also added PWROOT (OP; TP: RM1.65) for our F&B pick due to strong 4Q19 earnings backed by: i) recovering exports and ii) better production and operating costs, while also providing solid yields of c.6%. At the meantime, we maintain our UNDERWEIGHT call for the sin sub-sector.

Festivities to spur local demand. 2019 could be a challenging year with the adoption of new policies, which may put some pressure on consumer spending, although the government appears fluid with its implementation (i.e. with the postponement of sugar taxes to July 2019 to allow manufacturers more time to adapt). Nevertheless, the usual festivities sales (i.e Chinese New Year in 1Q19, and Hari Raya Aidilfitri in 2Q19), may help to spur demand for discretionary items, which in turn will benefit F&B players and Retailers, but the absence of sporting events this year could translate to less impulsedriven consumption. While yet to be seen, we could expect higher spending for the lower-income bracket with minimum wages of RM1,100 enforced in January 2019.

Retail prospects. We expect most of the retailers to perform weaker in 1Q19 due to the higher base in the previous quarter from the usual year-end promotion and Christmas festive season, but cushioned by the CNY festivities sales. This is in line with the Retail Group Malaysia (RGM)’s targeted sales growth for 1QCY19 at 3.1%, which is below the whole year targeted sales growth of 4.5%. We expect the strong growth only to come in during the second quarter with Hari Raya festive season sales, supported by gradual improvement in consumer sentiment as we move away from last year historic event and further powered by gradual sales price re-structuring exercise to mitigate the new SST impact. New government measures to lessen the financial burden of B40 group such as the BSH, minimum wages and targeted fuel subsidies are expected to support consumer spending on basic necessity items, which in turn will benefit affordable apparels retailers (PADINI) and supermarket/department stores operator (AEON).

For our 2Q19 top pick, we highlight PADINI (OP; TP: RM4.25). We like the stock for: (i) its resilient business model, focusing on the value-for-money segment in Brands Outlet, and (ii) expected improvement in SSSG and cost allocation. For FY19, the group will not be opening more than 10 outlets for the local market to streamline cost allocation, while maintaining the status quo for its Cambodia operation. We understand that the new, slower expansion plan is to streamline the operational cost towards strategic locations, while expanding regionally by taking over franchisee to strategically control the stores value. In the F&B space, we pick

PWROOT (OP; TP: RM1.65) for the anticipated delivery of strong full-year growth numbers and solid dividend returns (c.6%). Coming results should be backed by: i) better exports numbers from wider distributorship; ii) better input costs from more favourable coffee price averages; and iii) continued operational streamlining to introduce cost savings.

We maintain our NEUTRAL view on the consumer sector. Top-line expectations may be held back by a retracement in consumer spending as the domestic currency does not appear to be strengthening. However, this could play well with net exporters where markets are independent of our local developments. Nonetheless, recovery in margins for food manufacturers could come in the way of better commodity trends. While retailers with high import content may see a dampening impact from sales taxes, the lower forex exposure against CY18 and gradual sales price re-structuring exercise could potentially offset the higher tax component in their respective pricing models. As such, we do not expect significant re-rating in our applied valuation to our coverages.

We keep our UNDERWEIGHT rating for the sin-sub sector. Following 4QCY18’s results release, heightened expectations appear to be leveling, particularly on CARLSBG, for being resilient against market challenges. However, we believe there could have been some over-excitement within this space, which could result in a medium-term correction. While we keep our call for HEIM (MP, TP: RM21.90), we raised our TP for CARLSBG to RM21.80 (from RM18.00) but keep our UP call (refer to overleaf commentary: Changes in brewer dynamics). Meanwhile, we upgrade BAT to a MP call following its share price correction in lieu of the softer outlook from: (i) prolonged weakness in illegal market share (63% of industry volume), and (ii) potential shrinkage in overall market size from smoking bans. (Note that our TP are based on a cut-off date of 22-Mar-2019 and could be subject to further review.)

Source: Kenanga Research - 4 Apr 2019