We maintain our NEUTRAL rating on the consumer sector, as current valuations appear to have largely priced in the post-lockdown recovery from 2HCY20 onwards, barring a second wave of infections. Consumer sentiment is expected to remain soft moving forward, as the drag by the sombre economic conditions should be largely cushioned by stimulus packages (at an unprecedented scale of RM295b) and possibly a consumer-friendly Budget 2021. We note that the major risk to recovery lies in the event of a second pandemic wave. F&B counters, especially those with higher exposure to in-home consumption (ie, QL and PWROOT) should remain fairly resilient and would still fare better than the others in the event of a second wave. Retailers, on the other hand, are poised for a recovery after the relaxation of MCO starting 4th May 2020 from the pent-up demand which is expected to lean more towards essential items such as grocery and household products with lesser inclination toward premium foods/merchandise. Our preferred pick for the sector is PWROOT (OP; RM2.45) as we continue to favour the name for its resilient earnings expectation and attractive dividend yield of c.5-6%.

Subdued sentiment to extend into 2HCY20. It has been a rough first half of the year for most players, as the economy has been greatly disrupted by the Covid-19-led movement restrictions. We believe consumer sentiment is likely to remain muted ahead as we ease into the new norm, with spending priority being placed on value-for-money staples products instead of high-value discretionary goods. This is due to the slump in consumer sentiment, which is largely dragged by the pandemic-hit dire economic conditions and sombre labor market outlook. Nonetheless, barring further incident of a “second wave” outbreak, consumption should slowly pick up from 2HCY20 onwards, mainly cushioned by: (i) the government’s stimulus packages (unprecedented scale at RM295b), (ii) a low interest rate environment, and (iii) the expectation for a consumer friendly Budget 2021 which should provide a certain level of financial relief.

Relatively limited downside for F&B? Despite F&B counters’ touted defensiveness, the next quarterly results release due around August – for 2QCY20 is largely expected to be a blip as majority of the players are somewhat affected by the closure of F&B outlets, the lower retail footfall at the groceries stores and the lack of outdoor activities during the movement restrictions. That being said, the market is clearly looking beyond that, as a post-pandemic recovery has already been largely priced in with the KL Consumer Index recovering c.21% from its mid-March bottom. Noting that the largest risk to recovery lies in the possibility for a second wave of infections, we believe the F&B counters, especially those with higher exposure to in-home consumption (ie, QL and PWROOT) should remain fairly resilient and would still fare better than the others in the event of a second wave.

Retailers on cautious recovery. Retailers, on the other hand, are poised for a recovery after the relaxation of MCO starting 4th May 2020 from the pent-up demand. That said, consumer will be more cautious in spending and expected to lean more towards essential items such as grocery and household products with lesser inclination toward premium foods/merchandise especially with the rising unemployment rate as the labour market bears the brunt of the Movement Control Order (MCO) policy. In the event of further global coronavirus outbreak and domestic political turmoil taking more time to resolve, it would further affect the retail consumption pattern in Malaysia drastically. This will lead to Malaysia retail industry suffering from negative growth rate for the entire year. The last time when the Malaysian retail industry recorded a negative growth rate was during the 1997-98 Asian Financial Crisis when in 1998, the market size of the Malaysian retail industry contracted by 20%.

Reiterate our NEUTRAL rating on consumer sector, as we believe current valuations have largely priced in the expected gradual recovery from 2H2020 onwards. Downside risks should also be relatively limited as basic consumption remains buoyed by stimulus packages and most of the counters within our coverage possess the required balance sheets strength to tide over the ongoing crisis. Our F&B preferred pick would be PWROOT (OP; RM2.45) as we favour the name for its decent dividend yield of c.5-6% amid the low interest rate environment. Furthermore, the group’s earnings are expected to be buoyed by: (i) sustained sales momentum from its established brand presence which could be further driven by a pipeline of new launches, as well as (ii) relatively stable margins from more favourable raw material costs and continuous improvement in operational efficiency. For retailers, we upgrade AEON to MP from UP with unchanged TP at RM1.00, for which has plunged 11% since our last report and we believe that the negatives have been priced in. AEON rectified that the partnership with loss-making Aeon Big would only involve rendering the back-office services (first of its kind), resources and marketing strategy to Aeon Big at a certain fee arrangement. Coupled with its growing e-commerce and new business model, we believe that AEON would be able to cushion the impact of weakening consumer sentiment under these economic uncertainties.

Source: Kenanga Research - 9 Jul 2020