Kenanga Research & Investment

Consumer - 4QCY22 Results Review: Demand Intact

Publish date: Thu, 09 Mar 2023, 09:16 AM

We maintain our OVERWEIGHT rating on the consumer sector. The 4QCY22 results of consumer stocks under our coverage came in largely within expectations due to the boost from festivities, operational efficiency gains and better cost management. We expect consumer spending to sustain in the coming quarter backed by school holidays and more festivities. We are mindful of high inflation that erodes consumer spending, but this will be mitigated by government subsidies on fuel and food items, cash handouts to the B40 group and a relatively stable job market. We still see diverging 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 sector top picks are: AEON (OP; TP: RM1.80), PADINI (OP; TP: RM6.00) and QL (OP; TP: RM6.66) on resilient demand especially from the M40 group, and QL which is benefitting from the export recovery of its marine products.

The sector’s 4QCY22 results largely fell whithin our forecasts (at 59% of total) in contrast to 3QCY22 which saw a large number of companies (at 50%) in our consumer universe beating our forecasts. The large number of in-line results for the 4QCY22 quarter implied better management and operational efficiency keeping at bay the upward cost pressures. PADINI and QL beat expectations on high demand for their products with QL was boosted by strong exports of marine products. DUTCH LADY (TP: RM27.98) registered write-back of prior income tax provisions which boosted earnings. On the flipside, AEON failed to beat our forecasts due to higher-than-expected operating costs although top line met our expectation.

Another bumper 1H. Post pandemic we expects consumer spending to normalise further going into CY23. We expect another bumper 1HCY23 which is filled with major festivities and school holidays. Anecdotal observations suggested strong shopping footfalls for the Chinese New Year celebrations and the same scene is likely to be repeated ahead of AifilFitri in April 2023.

Following the year-end festivities which propelled spending in 4QCY22, Chinese New Year shopping likely boosted 1QCY23 while going forward we expect boosts from: (i) the current school holidays and the coming Hari Raya, (ii) reopening of borders with the return of international tourists, and (iii) continued financial assistance from the government to the low-income group in the revised Budget 2023. Hence, we anticipate strong footfall in malls and stores. Fashion retailers and F&B restaurants, particularly, are enjoying brisk business. We are mindfull of prevailing headwinds but recent accommodative policies by the government will likely alleviate concerns and boost consumer spending.

We expect topline for the remainder of 2023 to be resilient supported by: (i) higher footfall due to seasonality, (ii) strong spending power of its primary target customers (M40 group), given their healthy household balance sheet, (iii) expansion and refurbishment of stores, and (iv) gradual return of international tourists. However, we are cautious on the margins as players mostly from the F&B segment are still exposed to prevailing high operating costs, coming from inputs and wages. Other players like PADINI, MR DIY, F&N and QL were able to show better report cards as they were able to defend margins on a combination of better product mix and operational efficiency coupled with the absence of major supply disruptions.

Mixed fortunes. We maintain our OVERWEIGHT stance on the consumer sector. We still see contrasting fortunes between retail players and F&B producers.The retail players are likely to maintain sales volume as their customer base is skewed towards the M40 group whose spending power is supported by a healthy household balance sheet. The retail players are also able to pass on higher costs and hence maintain their margins. On the other hand, F&B producers are likely to maintain their robust sales, but 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 for: (i) benefitting from the return of shopping-in-person (vs. online), resurgence of shopping in malls (vs. in neighbourhood grocers), and the return of office crowd (vs. working from home previously), (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 and partially mitigate labour shortage issue.

• PADINI for: (i) being a beneficiary of consumers replenishing their wardrobes for their return to offices and schools, and social activities, (ii) the strong spending power of its primary target customers, i.e. M40 group, given their healthy household balance sheets, and (iii) its strong net cash position enabling it to purchase inventory ahead of price hikes and potential supply disruptions.

QL for: (i) the sustained strong export demand for its marine products as exports have normalised post pandemic, (ii) its strong Family Mart convenience store franchise given its appealing Japanesethemed products and continued outlet expansion, and (iii) the strong growth potential of its poultry business in Indonesia and Vietnam on increased protein diet content as living standards improve with prices looking stable (and likely to increase in Indonesia).

Source: Kenanga Research - 9 Mar 2023

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