We maintain our OVERWEIGHT call with our focus still on the retailers. Despite sustained high inflation, we expect consumer spending to stay resilient in the absence of any immediate plan by the government to rationalise subsidies or reintroduce the GST, while the B40 group continues to benefit from various financial assistance programmes especially direct cash handouts. Also helping, are a relatively stable economy and a healthy job market, coupled with a strong household balance sheet of the M40 group. Our sector top picks are AEON (OP; TP: RM1.80), PADINI (OP; TP: RM6.00) and QL (OP: TP: RM6.66)

Consumer optimism returns. We continue to expect positive consumer sentiment going into 2QCY23 as the MIER consumer Sentiment Index (CSI) has once again breached the optimism threshold of 100 points; jumping 6.9 points to 105.3 in 4QCY22. Consumer sentiment continued to improve, albeit cautiously, as financial expectations strengthened alongside receding inflationary fears. However, despite the relatively stable household finances, MIER did note that spending plans were on a slight decline as consumers continue to feel the pinch of higher interest rates and a softer macroeconomic outlook but the pause in rate hike by BNM might see the return of spending on bigger-ticket items. Given the potential global slowdown in economic growth, we maintain our in-house GDP growth forecast of 4.7% (vs. 8.7% in 2022), underpinned by the recovery of the labour market and tourism aided by a weak MYR. Nonetheless, we believe consumer spending will remain robust as income tax cuts and cash handouts provide some level of support.

Resilient retailers. Similarly, we expect retail sales to sustain throughout 2023 following a 33.3% YoY increase in 2022. This is achieved following a strong 4QCY22 (+13.7% YoY) as accommodative policies and the healthy balance sheet of the M40 mitigated a 25bps hike in OPR in early November. With the local retail sales having recovered to pre-pandemic levels, Retail Group Malaysia (RGM) projects the local retail sales to only grow 3.5% in 2023 from a significantly higher base in 2022. Nonetheless, it still sees strong yoy growth of 9.2% in 1QCY22 (before tapering off). Specifically, department stores are projected to achieve a higher growth of 15.8% during the same period which augurs well for AEON and PADINI.

Volatile commodity prices. On the flipside, commodity prices have not fallen back to pre-pandemic levels. Consumer staple producers under our coverage are concerned over a renewed escalation of the Russian-Ukrainian conflict, leading to another round of food commodity supply-chain disruptions (barring this, indicators and consensus views are pointing to softer food commodity prices heading to 2024, but still above the pre-pandemic levels). Sugar is an exception with prices expected to continue to climb well into 2024. On the other hand, milk prices have been on a downward trend and are poised to return to the pre-pandemic levels by early 2024, which bode well for DLADY (MP; TP: RM29.78) and NESTLE (UP; TP: RM121.18) by then.

Conversely, the outlook for tobacco producers and brewers is looking cloudier. Most companies under our coverage foresee 2023 to be challenging as they expect rising inflation and volatile input costs to dampen sales volumes. Furthermore, the recently announced regulations on tobacco and vapour products seem mixed for BAT (MP; TP: RM12.00). On one hand, the regulation on vapour products brings about a more level playing field between the two competing tobacco products (and potentially narrowing the price gap between them) as well as provides opportunity for the group to introduce its own product as it had previously commented that it would only do so once the market was legalised and regulated. On the other hand, the large existing base of small sellers could feed into the illicit market once regulations are put in place. Furthermore, the Generational Endgame bill could signal the government’s intentions to sunset the industry.

Despite sustained high inflation, we expect consumer spending to stay resilient in the absence of any immediate plan by the government to rationalise subsidies or reintroduce the GST, while the B40 group continues to benefit from various financial assistance programmes especially direct cash handouts. Also helping, are a relatively stable economy and a healthy job market, coupled with a strong household balance sheet of the M40 group. The return of international tourists, especially those from China, will also contribute to footfall in malls and stores, benefitting fashion retailers and F&B restaurants.

Source: Kenanga Research - 6 Apr 2023