We maintain our NEUTRAL rating on the consumer sector. Our sector stock coverages’ 2QCY22 results came off marginally (against expectations) but were still amongst the best within sectors under our coverage. After the boost from economy reopening and festivities in 1HCY22, we expect consumer spending to normalise in 2HCY22. We are mindful of headwinds such as high inflation that erodes consumer spending power and the depleting pandemic handouts and fund withdrawals. We see a divergence of fortunes between retail players and F&B producers and we prefer the former as they are less vulnerable to the impact of high inflation. Our top picks are AEON (RM1.95) and PADINI (RM4.10) which customer base are skewed towards the M40 group.

Broadly positive. The sector’s 2QCY22 results from the recently concluded reporting season were amongst the best within sectors under our coverage. Although results came off marginally (against expectations) with 46%, 31%, and 23% coming in above, within and below our forecasts vs. 54%, 23% and 23% during the preceding quarter, they were still very commendable. F&N and QL beat on a combination of higher ASPs and pent-up demand amidst festivities. A better product mix skewed towards high-margin products coupled with festive pent-up demand saw AEON and PADINI beating expectations as well. CARLSBG and HEINEKEN surprised on the upside on a stronger-than-expected rebound on the economy reopening. However, MRDIY disappointed as we believe consumers shifted spending away from home improvement as movement restrictions were lifted.

Bumper 1H, cautious outlook in 2H. After the boost from reopening and festivities in 1HCY22, we expect consumer spending to normalise in 2HCY22. We are mindful of headwinds such as: (i) high inflation that erodes consumer spending power, and (ii) depleting pandemic handouts and fund withdrawals. These will prompt consumers to cut back or down trade or switch to cheaper alternatives. Our channel checks have lend credence to our views - footfall in malls and shops has eased after the Hari Raya celebration while sales have been hit across the board on multiple price hikes against a backdrop of nascent economic recovery and wage increases.

Nevertheless we expect topline for the remainder of CY2022 to be supported by: (i) recovery in the labor market, (ii) end-of-year demand with supporting policies (e.g. higher minimum wages, wage subsidy program), and (iii) gradual pick-up in tourism activities. We believe the M40 group will continue to maintain spending underpinned by a healthy household balance sheet, but the B40 group will be struggling amidst depleting pandemic handouts and fund withdrawals. We expect the retail players to be able to defend their margins on a combination of better product mix and operational efficiency coupled with the absence of major supply disruptions especially from China. The same cannot be said for F&B producers that have not raised product prices steep enough to offset higher input costs, for the fear of demand destruction (as consumers downtrade or switch to cheaper alternative) and loss of market share.

Divergence of fortunes. We maintain our NEUTRAL stance on the consumer sector. We see a divergence of fortunes between retail players and F&B producers. The retail players are likely to maintain their sales as their customer base is skewed towards the M40 group which spending power is supported by a healthy household balance sheet. The retail players are able to pass on higher costs and hence maintain their margins. On the other hand, while the F&B producers are likely to maintain their sales, this will be achieved at the expense of margins. The F&B producers have little room to hike prices as their customer base is skewed towards the B40 group that is harder hit by the high inflation.

Our top picks for the sector are AEON (OP; TP: RM1.95) and PADINI (OP; TP: RM4.10). We like AEON: (i) as it is a good proxy to consumers rekindling shopping-in-person (vs. online) which offers the sound-and-sight experience that online shopping is unable to match, and (ii) for its growth plans comprising four Komai-So stores (discount stores offering products at fixed prices of RM2.50, RM5 and RM10) and one full-fledged AEON store in IOI Putrajaya, apart from the refurbishment of three existing AEON stores. We like PADINI for: (i) the strong spending power of its primary target customers, i.e. the M40 group, (ii) its strong cash position, enabling it to stock up in anticipation of prices hikes and supply disruptions, if the need be, and (iii) its innovative all-in-one (men, women and children) Brand Outlet, boosting the chances of garnering footfall from shoppers.

Source: Kenanga Research - 9 Sept 2022