We reiterate our NEUTRAL rating on the consumer sector. Going forward, consumer sentiment is expected to remain resilient, riding on (i) strengthened consumer spending power following Bank Negara’s rate cut, and (ii) sticky demand for consumer staples as evidenced by minimal negative impact to sales amid passive government policies. Nonetheless, we also note that discretionary spending may take a step back from effects of the weaker Ringgit. For 3Q19, we choose MYNEWS (OP; TP: RM1.55) as the top pick for the sector for its (i) double-digit earnings growth (c.20% vs SEM’s at c.7%), and (ii) above-industry earnings margin (c.7% vs SEM’s at c.2%). In the F&B space, PWROOT (OP; TP: RM1.75) is chosen for its anticipated delivery of strong growth numbers, driven by (i) rationalisation strategy, which could yield better profitability, and (ii) better hedged commodity positions. Solid dividend yield of c.6-7% could also act as the cherry on top.

Going Steady. Despite rising global uncertainties of late, we expect consumer sentiment to remain resilient going forward, premised on: (i) strengthened consumers spending power following an overnight policy rate cut by Bank Negara Malaysia to 3%, and (ii) relatively sticky demand for our consumer staples, which was evidenced by minimal negative impact to sales amid passive government policies (i.e. SST, smoking ban). We also note that discretionary spending may take a step back from effects of the weaker Ringgit. The upcoming excise sugar tax on beverages effective Jul’19 looks likely to raise prices across most packaged beverage products as most manufacturers look to pass down the tax. However, we suspect it would not be overly detrimental to demand given the low quantum of increase on the affected products (i.e. 40.0sen/litre or 10.0sen/250ml can serving).

Opportunity to Buy into 3Q Retailers weakness to position for a better 4Q and Visit Malaysia 2020. Most retailers are expected to do better in 2Q19 from Hari Raya Aidilfitri festive season sales. However, retailers usually fare the worst in 3Q19 due to the absence of festivities that typically spur consumer spending. We believe that investors could use this opportunity to buy into 3Q weakness while expecting better growth in 4Q19 from year-end and Christmas festive season sales, as well as Visit Malaysia 2020 (refer to AEON and PADINI’s Quarterly net profit vs. share price table). This is in line with the RGM’s targeted sales growth for 2QCY19 at 5.5%, which is higher than the whole year targeted sales growth of 4.9%, as well as higher than 3QCY19 targeted sales growth of 3.9%. We believe the strong growth was as expected from Hari Raya festive season sales being the largest festival in Malaysia, while, supported by gradual improvement in consumer sentiment as we move away from last year’s historic event and further powered by gradual sales price re-structuring exercise to mitigate the new SST impact. On-going PH government measures to lessen the financial burden of B40 group such as the BSH, minimum wages and targeted fuel subsidies are expected to continue supporting consumer spending on basic necessity items, which in turn will benefit affordable apparel retailers (PADINI) and supermarket/department stores operator (AEON).

Visit Malaysia 2020 goodies. 2020 could be a better year for F&B players and Retailers with the launch of Visit Malaysia 2020. The Tourism, Arts and Culture Ministry is working towards achieving the target of 30m tourist arrivals that will generate around RM100b in income under the Visit Malaysia 2020 campaign. Note that, Malaysia already registered 6.7m visitor arrivals in 1QCY19 (+2.7% YoY). Government has allocated RM1b through the Tourism Infrastructure Fund, which available up to 31st Dec, 2020 or until depleted. The fund is available to all tourism infrastructure projects such as projects that contribute to the development of the tourism industry and not just limited to hotel, convention centre, facilities related to education, medical or agro-tourism. Retailers could tap into the fund to build around their existing infrastructure to cater for tourism activities, which may increase footfalls into their stores/malls.

For our 3Q19 top pick, we highlight MYNEWS (OP; TP: RM1.55) for its (i) double-digit earnings growth (c.20% vs. SEM’s at c.7%), and (ii) above-industry earnings margin (c.7% vs. SEM’s at c.2%). While new store openings will drive growth, it will be enhanced further with the introduction of ready-to-eat food and the new Maru Café offerings. In the F&B space, we pick PWROOT (OP; TP: RM1.75) for its anticipated delivery of strong growth numbers, driven by (i) rationalisation strategy, which could yield better profitability, and (ii) better hedged commodity positions. Solid dividend yield of (c.6-7%) could also act as the cherry on top.

We maintain our NEUTRAL view on the consumer sector. Top-line expectations may be held back by a weaker domestic currency which could otherwise, play well with net exporters whose 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, as well as from weaker forex exposure against CY18, gradual sales price re-structuring exercise could potentially offset the higher tax component in their respective pricing models. Meanwhile, the emerging US-China trade war could potentially affect retailers business conditions as their suppliers are largely from US and China. As such, we downgrade AMWAY to MP from OP with a lower TP of RM5.90 from RM7.25 based on lower targeted PER of 16.4x on FY19E EPS (-2.0SD of its 5-year historical mean PER), to reflect the earnings risks on the weaker forex exposure (its principal is US-based). We downgrade PARKSON to UP from MP, with an unchanged TP of RM0.240 based on SoP Valuation (implied PER of 30x based on FY20 EPS, above regional PER of 27x) as we believe the company could be affected by the weaker business condition in China. We also cut PADINI TP to RM3.75 from RM4.00, based on lower 13x FY20E EPS (from PER of 14x), inline with 5-year mean Fwd. PER, to reflect the earnings risks from higher products costs from its largest suppliers (70% of products from China).

Source: Kenanga Research - 4 Jul 2019