We reiterate our OVERWEIGHT call on the sector, maintaining our emphasis on retailers. Indicators are pointing towards sustained consumer spending supported by: (i) the reopening of the economy and the return of shoppers, commuters, the office crowd and international tourists; (ii) financial assistance to the low-income group and subsidies on fuels, electricity and selected food items to keep the cost of living in check; (iii) a relatively stable job market; and (iv) healthy household balance sheets of the M40 group. Our sector top picks are AEON (OP; TP: RM1.95) and MYNEWS (OP; TP: RM0.76).

Improving consumer sentiment. We expect consumer sentiment to stay positive going into 2023 on the heels of a 12.4-point jump in the MIER Consumer Sentiment Index (CSI) to 98.4 in 3Q2022 which was on the verge of breaching the optimism threshold of 100 pts. Overall sentiment improved during 3Q2022 as financial expectations steadied, resulting in an increase in spending. This was despite the uncertain outlook of both the local and global economies, as well as the squeeze brought about by the sustained elevated inflation and rising interest rates.

The subsidies on fuels, electricity and selected food items will help relieve some inflationary pressure while we project inflation to start tapering from 2H2023, bringing the full-year headline inflation stabilising at 2.5% based on our in-house forecast.

Similarly, we expect local retail sales to stay robust going into 2023 following an almost YoY doubling in 3Q2023 according to Retail Group Malaysia (RGM) (which beat its expectation of a 50% rise). While this is partially due to a low base (3QCY21 saw the reintroduction of the movement control order), RGM also attributed the strong performance in the retail segment to recovering domestic demand. It has since revised its 4Q2022 growth forecast upwards to 6% from 1% previously, and is looking to upgrade its full-year growth forecasts of 31.7%.

Consumption well supported. In 2023, we believe consumer spending will be well supported by: (i) the reopening of the economy and the return of shoppers, commuters, the office crowd and international tourists; (ii) financial assistance to the low-income group and subsidies on fuels, electricity and selected food items to keep the cost of living in check; (iii) a relatively stable job market; and (iv) healthy household balance sheets of the M40 group.

Our top picks are AEON (OP; TP:RM1.95) and MYNEWS (OP; TP: RM0.76).

We like AEON as: (i) it benefits from the return of shoppers, the office crowd and international tourists; (ii) its customer base that is skewed towards the M40 group whose spending power is less impacted by high inflation; and (iii) its digital transformation, particularly the introduction of self-checkout for customers, that will result in cost savings.

We like MYNEWS for: (i) the still under-penetrated convenience store market in Malaysia with approximately 111 convenience stores per million population currently based on our estimates vs. 291, 445 and 268 of Thailand, Japan and Australia respectively; (ii) it having returned to the growth path in terms of outlet expansion post the pandemic and the turnaround at its FPC and (iii) Its differentiation from competitors through Korean products.

Source: Kenanga Research - 6 Jan 2023