We reiterate our NEUTRAL rating on the consumer sector due to the lack of near-term re-rating catalysts and demanding valuations. However, given the – buoyancy of stimulus packages, a low interest rate environment and the vaccination rollout consumption will still be resilient and looking on the uptrend. The cautious sentiment seen previously will be on the reverse thanks to the vaccine rollouts both domestically and globally which will see business and consumer sentiments improving. The major deciding factor to recovery lies in a successful and effective Covid-19 vaccination program which we see to be fully expanded by 2HCY21. Retail counters (i.e. AEON, AMWAY and PADINI) should see pent-up demand given the easing of lockdowns and the upcoming festive season. F&B counters, especially those with higher exposure to in-home consumption (i.e. QL, SEM, NESTLE and Dutch Lady) would remain fairly resilient and bolstered by the ease in restrictions. However, given the downside risk on a potential 3rd wave of the pandemic, we maintain NEUTRAL and stay selective on the sector as most counters’ valuations remain elevated; favourite pick is PADINI (OP; RM3.50) premised on the vaccine rollout, ease of lockdown, upcoming festive season and being a popular house-hold brand.

Optimistic as positive tracks are in front. We believe consumer sentiment will be on an uptrend going into 2QCY21, given the easing of restriction and upcoming festive season. We see a gradual demand recovery for both value for-money staples as well as high-value discretionary products. Though the recovery in consumer sentiment in the near-term may be stalled by concerns of resurgence of Covid-19 cases locally, we believe new resurgences will be dealt locally (as announced by the PM recently) and not state-wide and nation wide as practised before. Basic consumption will continue to be supported by: (i) the government’s stimulus packages of an unprecedented scale, and (ii) a low interest rate environment.

Worst is likely over. The worst of the pandemic is likely behind us, more than 12-month after it hit our shores. The development of vaccines to contain the pandemic coupled with the positive rollouts will see easing of restrictions gradually. Consumer counters should see a recovery momentum ahead, banking on anticipation of a successful containment of local Covid-19 cases, which would eventually result in: (i) normalization of earnings for the F&B’s HoReCa channels, (ii) return of retail footfall to the malls and stand-alone retail stores, as well as (iii) the revival of the local tourism scene as inter-state travels restrictions are gradually lifted. Noting that the largest deciding factor for recovery comes down to the successful deployment of Covid-19 vaccine, we believe that players especially those with higher exposure to in-home consumption should remain fairly resilient with the added advantage of pent-up demand as interest rates remained dovish. Notably, in an attempt to adapt to the changing consumer patterns, majority of companies are ramping up their online presence – mostly through 3rd party e-commerce platforms, aiming to capture additional market share from consumers favoring online shopping over brick-and-mortar stores. However, we do not discount uncertains risks such as: (i) rise of new strain of virus which will will demand lockdowns, and (ii) volatile commodity prices (due to recovering demand) which will crimp margins.

Maintain Neutral on the sector due to the lack of near-term re-rating catalyst and demanding valuations. Risks of a 3rd wave of the pandemic is still and on-going concern but downside risks should be relatively limited as basic consumption remains buoyed by stimulus measures and most of the counters in our coverage possess the required balance sheet strength to tide over the ongoing crisis. With the valuations for the majority of our stocks remaining elevated, our sector’s top pick is PADINI (OP; TP: RM3.50) premised on: (i) anticipation for a robust recovery in the upcoming festive season with an expanded vaccination rollout by then, (ii) solid net cash position of c.RM521m as of this quarter, which would allow the group to weather through these challenging times, (iii) potential higher dividend payout given its strong cash position, and (iv) its brand name presence.

Source: Kenanga Research - 5 Apr 2021