We expect domestic consumer spending to remain  resilient, buoyed  by high  savings,  low  unemployment  and  stronger  tourist  arrivals  in conjunction with Visit Malaysia Year (VMY) 2014. Maintain NEUTRAL on the  overall  sector  due  to  rich  valuations.  We  continue  to  like  QL Resources and NTPM’s good growth prospects and solid fundamentals.

• Macro conditions benign.  We believe Malaysia’s economic outlook will brighten  in  tandem  with  the  gradual  recovery  in  the  US  and  Eurozone economies. Our economist projects that Malaysia’s real gross domestic product (GDP) will likely expand to 5.4% in 2014 from 4.7% in 2013.  The implementation  of  minimum  wages  among  small  and  medium enterprises (SME) effective this year and the generous cash handouts to low-income  households  under  the  BR1M  scheme  should  also  boost disposable incomes, and in turn spur consumption.
• Consumer spending shows resilience. We expect consumer spending to continue  to  grow  due to high savings, low unemployment and better tourist arrivals in conjunction with  VMY  2014, albeit at a more moderate 6% pace in 2014, after the relatively strong 7.2% expansion projected for 2013. We expect to see  consumers spend more  prudently  as they  keep consumption  within  their  budgets  amid  high  household  debt  and  the 14.9% increase in power tariff effective 1 Jan.
• 3QCY13  results  as  expected.  The  results  were  generally  in  line  for most of the consumer counters  that we tracked.  Of the 20  stocks  in our sector universe,  the results from  four  were above,  13  were in line  while three came in below.
• Maintain  NEUTRAL.  Since  most  of  the  stocks  (especially  the  bigger caps) are still trading at a premium, we advise investors to focus on highgrowth  and  good  dividend-paying  counters.  Our  top  picks  are  QL Resources and NTPM.

Strategy
Slow and steady
F&B.  As  the  demand  for  basic  necessities  is  usually  stable  and  inelastic,  the performance  of  F&B  companies  will  depend  largely  on  commodity  prices  and manufacturing  cost.  While  the  lower-income  groups  might  tighten  their  belt,  we believe  this  will  have  a  minimal  impact  on  the  companies  under  our  coverage,  as their products are generally affordable. QL Resources (QLG MK, BUY, FV: MYR4.90) remains our Top Pick, as we continue to like the company’s regional expansion story and improving poultry margin.

Retail.  Retail sales should be resilient in 1Q  in view of  the upcoming Chinese New Year  shopping  season.  We  believe  that  low-  to  mid-income  earners  will  remain prudent  in  their  spending,  especially  on  non-necessities,  due  to  the  higher  living expenses  arising  from  the  rationalisation  of  government  subsidies.  We  like  Padini (PAD  MK,  BUY,  FV:  MYR1.95)  for  its  good  dividend  yield  and  aggressive  store expansion,  which  will  spur  the  group’s  top-  and  bottomline  numbers,  while  NTPM (NTPM MK, BUY, FV: MYR0.87) remains as our Top Pick in the retail segment for its solid  fundamentals  and  decent  dividend  yield.  We  believe  the  group  is  on  track  to deliver satisfactory results, spurred by its upcoming expansion to Vietnam and robust growth  in  its baby diapers unit. We are NEUTRAL on large-cap retail counters such as  Amway,  AEON  and  Parkson,  which  have  higher  relative  valuations  among  the consumer stocks.

Tighter spending to weigh on beer and cigarette sales
Rising  cost  of  living  to  sap  beer  volume  growth.  Although  beer  sales  volume grew  at  a  robust  pace  for  the  past  seven  years  (2006-2012  CAGR:  5.3%)  -  an extended period marked by the absence of an excise duty hike - we are beginning to see  demand  taper  off.  Going  forward,  we  expect  beer  sales  volume  to  stay depressed, even though  the sector  was, once again,  spared an excise duty hike in Budget 2014. We hold the view that the Government’s rationalisation of subsidies on petrol, sugar and power, as well as the implementation of the goods and services tax (GST) in 2015, would  dampen  beer sales  as consumers scale back on discretionary spending given their shrinking wallets. We are projecting a volume growth of 1% y-oy for the domestic beer industry in FY14.

Higher ASPs  to  hurt demand for  legal cigarettes.  Since the Government had left excise duty unchanged during  for two  years  during  2011-12,  the decline in cigarette volume  in the tobacco industry  (CAGR:  -0.3%) was not as bad as that from  2002-10 (CAGR:  -4.9%).  However, as an off-budget initiative  in Sept 2013  raised  the duty  by MYR0.60/pack (+14%),  we foresee volume growth  slowing down sharply.  To make matters  worse, cigarette manufacturers  had raised their ASPs  by a larger quantum – by  MYR1.50/pack  (+14-17%)  –  after  the  latest  round  of  increase  to  pass  on  more costs to smokers as well as to preserve their profitability. We also see the substitution by cheaper illicit cigarettes (at more than half the price of legal cigarettes) potentially aggravating this decline. Hence, we are forecasting an industry volume contraction of 10% y-o-y for FY14.

3QCY13 Report Card

• F&B and retail
• Brewery and tobacco sector

No surprises. The results were generally in line for most of the consumer counters. 
As expected, food & beverage (F&B) players like Nestle Malaysia, QL Resources and Oldtown  delivered  good  numbers  owing  to  resilient  demand.  Retailers  with  strong brand  names  like  AEON  Co  (M)  and  Padini,  meanwhile,  continued  to  chalk  up  encouraging  sales  and  earnings  growth,  supported  by  a  sturdy  domestic  market, while Parkson’s results were still weak owing to a challenging operating environment.

All said, we still like NTPM’s regional expansion, which is well in progress. The  3Q  results of two out three  consumer packing  companies  we cover  -  Daibochi and  Johore  Tin  -  were  in  line,  while  VS  Industry  (VSI)  beat  forecasts  and  SKP Resources missed expectations. VSI was the top performer, with its 1QFY7/14 (AugOct) net profit surging  23.9% q-o-q and 24.8% y-o-y. Daibochi,  too,  posted earnings growth, with 3Q13 net profit  jumping  23.0% q-o-q and 7.2% y-o-y.  All said, we are overall  NEUTRAL  on  this  segment  due  to  weak  earnings  visibility,  and  remain cautious on SKP and VSI’s prospects this year.Within  expectations.  The  brewery  and  tobacco  players  we  cover  reported  3Q13 financial results which were within expectations. During the quarter, Guinness (GUIN MK, SELL, FV: MYR15.19) and Carlsberg (CAB MK, SELL, MYR11.31) saw pressure on their toplines as sales volume slowed on the back of waning demand for beer. The latter’s Singapore  unit, which  continued to face intense competition, also  contributed to  the group’s  overall revenue decline. Meanwhile, British American Tobacco (ROTH MK, SELL, FV: MYR57.06) and JT International (RJR MK, NEUTRAL, FV: MYR6.27) experienced  declines  in  sales  volume  but  the  negative  effects  were  mitigated  by higher  ASPs  as  both  companies  raised  cigarette  prices  by  MYR0.30/pack  in  early June 2013.

Source: RHB