Kenanga Research & Investment

Consumer - Margins Still At Risk

Publish date: Wed, 29 Dec 2021, 09:44 AM

We stay NEUTRAL for the sector given the risks of volatile input prices ahead. While we are positive on toplines given the easing of restrictions and pent-up demand underpinned by incoming festivities on the horizon, we remain vigilant on the somewhat uneven pace of recovery amidst supply disruption and potential threat of new contagious Covid variants. Although toplines are expected to be robust in tandem with demand, margins will face pressure from both elevated input costs and volatile freight charges. Given the sharp price correction seen recently, we have OUTPERFROM calls for most of the stocks in our consumer stocks universe, namely; AMWAY (OP; TP: RM6.05), AEON (OP, TP: RM1.60), DLADY (OP: TP: RM40.20), F&N (OP; TP: RM32.45), MR DIY (OP; TP: RM4.10), MNEWS (OP; TP: RM1.00), PADINI (OP; TP: RM3.20), QL Resources (OP: TP; RM6.00) and BAT (OP; TP: RM16.70). PADINI is our Top Pick premised on the recovery, easing of restrictions coupled with pent-up demand and incoming festive seasons ahead.

As we move into the new year, we are postive on surging demand, fuelled by pent-up demand and the coming of two major festivities ahead. MIER’s Consumer Sentiment Index showed sentiment rising with restrictions mostly eased and the acceleration of the vaccination roll-out. Consumer sentiments will be further boosted with the acceleration of the booster shots, receding Covid cases coupled with the Omicron variant reportedly less severe from the Delta Variant and reopening of business activities. As can be observed in recent weeks, footfalls traffic are on the rise with the HORECA players seeing surge in traffic boosting the F&B players. However we note that industry players remained vigilant on the possibility of Covid-19 cases heading north again on new contagious variants of the virus, looming on the horizon.

Margins still a challenge. The last reporting quarter was a dissapointment which was not surprising given the FMCO. In fact, the last two reporting quarters saw negative growth QoQ vs positive growth in the three preceding quarters (from 3QCY20) as the intensive lockdowns took its toll. Margins dipped given the elevated input prices and rising logistics cost. On the global front, the pace of economic recovery is gathering momentum, exacerbating volatile input prices. This economic momentum gave rise to a variety of challenges; rising input and logistics costs as supply tries to cope with rising demand. Global economic indicators showed that input prices are likely to remain elevated, in fact even rising in the coming months which will pose risks to earnings indicating that pre-pandemic level margins is still a long way off.

The challenging margins outlook reiterates our NEUTRAL call for the sector. Toplines will be robust if not better given the easing of restrictions driven by pent-up consumer demand and incoming festivities. However, earnings will likely be challenging given the still volatile input prices. The unfavorable Ringgit is also a challenge as most of the stocks in our consumer stocks universe are domestic players relying on imported supply on raw materials and commodities. While we observe that some producers have started to pass these rising inputs costs to consumers, the larger consumer staple producers are still understandably cautious in doing so. Nevertheless, we have OUTPERFORM call for most of most of the stocks in our consumer universe given the sharp share price correction recently namely; AMWAY (OP; TP: RM6.05), AEON (OP, TP: RM1.60), DLADY (OP: TP: RM40.20), F&N (OP; TP: RM32.45), MrDIY (OP; TP: RM4.10), MNEWS (OP; TP: RM1.00), PADINI (OP; TP: RM3.20), QL Resources (OP: TP; RM6.00) and BAT (OP;TP: RM16.70). PADINI is our Top Pick premised on economy recovery, easing of movement restrictions coupled with pent-up demand and incoming festive seasons ahead. A solid balance sheet and trading at a 3-year low further solidifies it as our Top Pick.

Pandemic threat is still an on-going concern. The market has remained on a downward trend, since October, on global concerns on the slow roll-out of the vaccinations especially coming in the US and Europe. The threat of new mutated variants emerging also dragged the market given as implementation of booster shots were slow to roll out. YTD, the KLCU ended CY21 with a 7% dip tracking closely the FBMKLCI dipping 8% YTD. QoQ, the KLCSU tanked 7% (vs -2% for the FBMKLCI) as the threat of Omicron raises the spectre of another lockdown stunting the business activities again.

…but Consumer Sentiment rising. The MIER Consument Sentiment Index has showed choppy sentiments since Mar 2020 as lockdowns were inroduced to curb the pandemic. As restrictions started to be eased in mid-Sep with various states moving into Stage 4 of the National Recovery Phase, sentiment are slowly but surely moving up.

Challenging margins. We are positve on a rebound and robust topline ahead as economic activities accelerate as the economy reopens. Input prices will be at elevated levels as global economic recovery accelerates which give rise to a variety of challenges – rising input prices coupled with rising freight costs as supply tries to cope with rising demand. With raw materials prices seen to rise by 10-20% in 2022, it is expected that producers will pass the rising costs to consumers at the risk of lower sales.

i) Milk commodities. Details from Global Dairy Trade (GDT) shows prices remaining elevated. The GDT Price Index movement showed a slight breather in December, dipping 150bps but still above pre-pandemic levels by 40%. Both Anhydrous and Skim Milk Powder saw 60 to 90bps surge in their respective price Index but Whole Milk Powder fell 330bps MoM. Data from Trading Economics showed milk prices remaining elevated and likely to rise by another 21% by end of 2022, implying milk commodity prices will remain elevated throughout 2022.

ii) Coffee, sugar. Coffee futures were seen trading at a low since Nov 2021 due to expectations of lower demand and prospects for better weather conditions in Brazil. Uncertainty surrounding the global economic recovery brought by the highly contagious Omicron variant has dented demand expectations for soft commodities, while much-needed rains in Brazil this month pointed to higher supply ahead. Still, prices are set to remain elevated in the medium term. The USDA expects Brazil coffee production to fall by 14m bags to 56m and the world coffee output to decline by 8m bags to 167m. At the same time global consumption is expected to rise by 1.5m bags to 165m bags implying prices remaining elevated in 2022. Data from Trading Economics sees coffee trading at 199 USD/lbs by end-2022 from the current 180 USD/lbs. Sugar prices which has been rising, 24% since early 2021, is expected to maintain its momentum throughout 2022 and expected to trade at 0.2226 USD/lb (or +10%) by end of 2022.

iii) Corn, soybean and wheat. These commodities are seeing elevated prices on prodcution concerns such as: (i) surging input prices, renewed demand (corn), ii) lower supply (from Argentina and surging demand from China) and (iii) supply concerns (wheat) due to excessive wheater plus Russia’s plan to reduce its export by 1m tonnes (from 9m tonnes). Corn are expected to trade higher by 10% with soybeans at +8% and wheat (+10%) by end of 2022.

Source: Kenanga Research - 29 Dec 2021

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2021-12-30 15:08

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