We maintain our OVERWEIGHT call with a preference for retailers. We expect consumer spending to stay resilient, as reflected in our FY23F private consumption growth projection of 6.1%, backed a relatively stable economy and a healthy job market, coupled with a strong household balance sheet of the T20 and M40 groups, while the B40 group will continue to benefit from various financial assistance programmes implemented by the government especially direct cash handouts. We see an expected pull-back in spending plans of consumers as normal, after the splurging on goods and services upon the economy re-opening with excess savings from the pandemic. Our sector top picks are AEON (OP; TP: RM1.80), PADINI (OP; TP: RM5.80), and QL (OP; TP: RM6.29).

Consumer optimism looking to sustain. We project private consumption to grow by 6.1% in CY23 (down from +11.2% in CY22 which was bumped up by the economy re-opening) underpinned by a relatively stable economy, a healthy job market and a strong household balance sheet of the upper- and middle-income groups, while the spending power of the low-income group will be supported by various financial assistance programmes from the government especially direct cash handouts.

Meanwhile, the MIER Consumer Sentiment Index (CSI) has consistently hovered around the optimistic threshold of 100 points during the first quarter of the year. However, while household finances have remained relatively stable, MIER has observed a slight pull-back in spending plans. This can be attributed to consumers feeling the impact of higher interest rates and a softer macroeconomic environment. We believe this is normal after the splurging on goods and services upon the economy re-opening with excess savings from the pandemic.

In spite of this, Retail Group Malaysia (RGM) projects retail sales growth in 3QCY23 to remain in positive territory with a 2% YoY increase underpinned by: (i) higher footfall driven by seasonality, (ii) rising tourist arrivals, and (iii) sustained spending power of the M40 group, and (iv) a lower unemployment rate (Exhibit 3). Retailers like AEON and PADINI will specifically be buoyed by renewed expansion and refurbishment of stores (that will increase footfall) and the return of international tourists (partly enticed by the MYR weakness).

Mixed outlook on commodity prices. On the cost front, most commodity prices are clearly on a downtrend this year but still a ways to go from pre-pandemic levels with the exception of milk (exhibit 11) as demand and logistics tightness eased. Most leading indicators are showing downward trend in prices, well into 2024. Full impact of El Nino is likely to come in 2HCY24. In the last major El Nino event in beginning of summer 2015, surge in global commodity prices came in 12 months later especially for soyabeans, coffee, sugar and milk.

Despite sustained high inflation, we expect consumer spending to stay resilient as there are no immediate plans to reintroduce the GST with subsidies likely based on a net income level. 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 and attracted by the weaker MYR will also contribute to footfall in malls and stores, benefitting fashion retailers and F&B restaurants.

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 mitigate labour shortages.

• PADINI for: (i) it 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 overseas demand for its marine products as exports have normalised post pandemic (with China’s reopening), (ii) its strong Family Mart convenience store franchise given its appealing Japanese-themed products and continued outlet expansion, (iii) the strong growth potential of its poultry business in the region on rising affluence resulting in rising protein intake in diet, and (iv) the return of EL Nino which is likely to boost its marine products segment.

Source: Kenanga Research - 14 Jul 2023