We reiterate our NEUTRAL rating on the consumer sector, due to the lack of re-rating catalysts in the near-term. Private consumption should continue to be underpinned by government stimulus packages, low interest rate environment and possibly a consumer-friendly Budget 2021. That said, consumer sentiment is likely to stay at a cautious tone for the rest of the year, as the economy could still take quarters to recover to pre-pandemic levels, no thanks to the lingering impacts of the Covid-19 outbreak. We note that the major risk to recovery lies in the event of a second country-wide lockdown. F&B counters, especially those with higher exposure to in-home consumption (i.e. QL, DLADY and PWROOT) should remain fairly resilient and would still fare better than the others in the event of a second MCO. Retailers, on the other hand, are poised for a cautious recovery which is expected to lean more towards essential items such as grocery and household products with lesser inclination toward premium foods/merchandise. Our retail preferred pick is AEON (OP: TP RM1.00) for its resilient business models with an attractive dividend yield of c.5-6%. For F&B, we favour PWROOT (OP; RM2.75) as it serves as an attractive dividend play amid the low interest rate environment – offering dividend yield of c.5-6%. Valuations also seem undemanding now at FY22E PER of 15x (near 56% discount to our consumer sector) given its resilient earnings expectations.

Cautious sentiment may be here to stay. The recovery in consumer sentiment postlockdown may be curbed by worries surrounding the absence of a vaccine, as well as the lingering impacts of Covid-19 prevention measures (i.e. lower operating hours and capacity in compliance with the SOP, certain industries are still prohibited from operating, etc). Hence, we maintain our view that consumer sentiment is likely to remain cautious for the year, with more spending priority being placed on value-formoney staples instead of high value discretionary products. Nonetheless, barring a second country-wide lockdown, private consumption should continue to be underpinned by: (i) the government’s stimulus packages at an unprecedented scale, (ii) a low interest rate environment, and (iii) the expectation for a consumer-friendly Budget 2021 which should provide some additional financial relief.

Light at the end of the tunnel? The worst pandemic-hit quarter should be behind us now, with 2QCY20 bearing the biggest impact of the movement control order (MCO). Moving forward, we believe that our F&B counters should continue to recover for the rest of the year, on the back of: (i) demand recovery from the reopening of majority of the HORECA channels, (ii) normalising retail footfall at the groceries stores, as well as (iii) the revival of the domestic tourism scene as Malaysians are still prohibited from international travels. Noting that the largest risk to recovery lies in the possibility for a second MCO, we believe the F&B counters, especially those with higher exposure to in-home consumption (i.e. QL, DLADY and PWROOT) should remain fairly resilient and would still fare better than the others. Notably, the majority of companies are ramping up their online presence – mostly through 3rd party e-commerce platforms, aiming to cater for any shift in consumer trends favoring online shopping over brick-andmortar stores.

Retailers on cautious recovery. Retailers, on the other hand, are poised for a cautious recovery as 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 high level of 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 the domestic political turmoil taking a longer time to resolve, it would further affect the retail consumption pattern in Malaysia drastically. This will lead to Malaysia’s retail industry suffering from a contraction for the entire year. The last time the Malaysian retail industry recorded a negative growth rate was during the 1997-98 Asian Financial Crisis, when the market size of the Malaysian retail industry contracted by 20% in 1998.

Reiterate our NEUTRAL rating on consumer sector due to the lack of near-term rerating catalysts while downside risks should be relatively limited as basic consumption remains buoyed by stimulus packages and most of the counters within our coverage possess the required balance sheet strength to tide over the ongoing crisis. Our F&B preferred pick PWROOT (OP; RM2.75) is an attractive dividend play amid the low interest rate environment – offering div yield of c.5-6%. Its valuation also seems undemanding now at FY22E PER of 15x (at near 56% discount to our consumer sector) given its resilient earnings expectations as well as relatively well-managed margins from continuous improvement in operational efficiency. For the retailers, we prefer AEON (OP: TP RM1.00) for its resilient business models with an attractive dividend yield of c.5-6%. AEON’s retail operations is considered essentials activity, unaffected by the MCO, while its property business segment is poised for a recovery with the rise in retailers searching for a presence in neighbourhoods malls which we believe are faring better under the “new normal”. Ourleast preferred stock would be HAIO due to depressing business environment with dwindling number of MLM distributors. Note that, we ceased coverage on HAIO on our results note dated 30/09/2020.

Sin sub-sector upgraded to OVERWEIGHT. We are upgrading HEIM (OP; RM22.95) @ 22x FY21E PER (-0.5SD over 3-year mean) and CARLSBG (OP; RM24.25) @ 26x FY21E PER (3-year mean) with unchanged TPs from MARKET PERFORM to OUTPERFORM as we see values emerging from recent share price weakness. We note that the operating landscape for the breweries still remains challenged by uncertainties brought by the global pandemic (i.e. continued closure of a number of the ontrade channels, lower capacity and operating hours for eateries), as well as stricter enforcements for drunk drivers of late following some fatal accidents linked to drunk driving. That being said, this could be a good time to build positions on these defensive names which have a proven (pre-Covid) track record of inelastic beer demand, steady earnings growth and generous dividend payment. The foresaid merits are further supported by the fact that gradual earnings recovery should be underway, following the resumption of brewery operations since May, coupled with the anticipated pick-up in beer demand ahead backed by pent-up demand post lockdown and demand boost from the revival of local tourism scene. Meanwhile, we believe that tobacco player, BAT (MP; RM10.05) will continue to struggle with the illicit tobacco issue, which may be further exarcebated by the weaker purchasing power caused by a disrupted economy. Thus, any meaningful recovery would only materialise with a sustained clampdown on the illegal cigarettes trade.

KLCSU continues to underperform KLCI by 8%. Against the backdrop of uncertainties surrounding a pandemic-fuelled recession, an oil price crash as well as local political turmoil, our local market entered 2020 plunging deep into the negative region. This was followed by a “V-shaped” recovery in stock prices from March, which saw both FBMKLCI and the KL Consumer Index (KLCSU) rebounding sharply to erase nearly all of the earlier losses. As of our cut-off date, the KLSCU has declined by 14% YTD which is behind of our local bourse’s decline of 6%. Among the components of KLCSU that are within our consumer coverage, NESTLE, HEIM, CARLSBG and BAT were the key laggards, likely due to: (i) the exit of foreign funds from the rather illiquid NESTLE in light of the macro-economic headwinds, as well as (ii) the flight of funds from the Sin counters in anticipation of potentially weaker earnings and lower dividend pay-out ahead.

Source: Kenanga Research - 6 Oct 2020