Consumer  stocks  reported  respectable  4QCY13  numbers,  mainly supported by resilient domestic demand.  Keep  NEUTRAL on the sector due to rich valuations. Our Top Picks are QL Resources and Padini.

• 4QCY13 results generally within expectations.  Overall, the  consumer counters  under  our  coverage  reported  numbers  that  were  within expectations. Of the 20 stocks in our sector universe,  13 posted results that were in line, three were above, and four missed our estimates.
• We continue to like QL  Resources  and Padini.  Most of the consumer companies  reported results that matched  estimates. Overall, the food & beverage players registered solid numbers as usual, buoyed by  inelastic and  stable  demand.  Among  retailers,  Parkson  Holdings’  (PKS  MK, SELL, FV: MYR2.25)  results were still below street estimates due to a challenging operating environment. Both our Top Picks, QL Resources (QLG  MK,  BUY,  FV:  MYR3.60)  and  Padini  (PAD  MK,  BUY,  FV: MYR1.95),  continued  to  deliver  strong  earnings  growth  as  a  result  of their aggressive expansion plans, while  Daibochi (DPP MK, NEUTRAL, FV:  MYR3.53)’s  FY13  results  were  in  line  with  our  and  consensus estimates.  However,  SKP  Resources  (SKP  MK,  SELL,  FV:  MYR0.18) and  Johore  Tin  (JOHO  MK,  SELL,  FV:  MYR1.38)’s  numbers  were disappointingly  below  estimates.  Due  to  softening  consumer  demand and  an  expected  increase  in  raw  material  prices,  the  plastic  and packaging industry’s outlook remains murky in the near future.
• Still  negative  on  sin  stocks.  Among  sin  stocks,  British  American Tobacco (ROTH MK, SELL, FV: MYR54.76), JT International (RJR MK, NEUTRAL, FV: MYR6.27) and Guinness Anchor (GUIN MK, SELL, FV: MYR13.49)  reported  results  that  were  in  line,  while  Carlsberg  Brewery (CAB  MK,  SELL,  FV:  MYR11.55)’s  were  ahead  of  expectations.  For 2014,  we  expect  cigarette  players  to  continue  to  suffer  from  declining sales  volume  given  the  Government’s  14%  excise  duty  hike  late  last year.  Similarly,  it  will  be  a  challenging  year  for  the  brewers,  as consumers/drinkers  become  more  cautious  on  discretionary  spending. As a whole, we maintain our NEUTRAL stance on the consumer sector, but are UNDERWEIGHT on the tobacco and brewery sub-sectors

4QCY13 Summary

F&B sector stays solid

Resilient demand.  All F&B players in the RHB universe delivered results  that were in line, while most of the consumer counters’  performance  met expectations.  Nestle (NESZ  MK,  NEUTRAL,  FV:  MYR67.00)’s  turnover  and  earnings  expanded  on  the back  of  solid  domestic  demand  and  favourable  raw  material costs.  Similarly,  lower raw material prices,  eg  corn and soya bean,  as well as  additional contribution from regional  expansion  significantly  bolstered  QL  Resources’  earnings.  Sales  and  net profit for Oldtown (OTB MK, BUY, FV:  MYR2.32)  expanded as improved contribution from its  fast-moving consumer goods (FMCG) division offset a slight earnings drop in its F&B unit.  QL Resources remains  our Top Pick for  the sector as it  is a good proxy to the emerging markets  given its  exposure to Indonesia and Vietnam,  which have promising growth prospects.

Golden quarter for retailers

Supported  by  domestic  demand.  Among  the  eight  retailers  under  our  coverage, five  posted  results  that  were  in  line,  two  were  below  and  one  was  above  our estimates.  We  upgraded  AEON  (AEON  MK,  FV:  MYR15.80)  to  BUY  from  Neutral,given  the  recent retracement of its share price coupled with its  solid fundamentals. The group announced a 1-for-1 bonus issue, as well as a 1-into-2 share split post the bonus issue. We are positive on the proposals as the bonus issue and share split will help  to  improve  the  stock’s  liquidity  and  affordability.  Padini ,  meanwhile,  delivered strong numbers that were buoyed by sales booked during the festive season, and the encouraging performance  of  its  Brands Outlet  label.  We  continue to like the group’s aggressive store expansion strategy and good dividend yield.

Companies like  AEON, Amway  (AMW MK, NEUTRAL, FV:  MYR11.80), Padini and NTPM (NTPM MK, TAKE PROFIT, FV: MYR0.82), which mainly depend on domestic consumption, reported decent numbers that met our estimates. However, the weaker economic outlook took a toll on companies with substantial exposure to China and Vietnam, such as Parkson Holdings. The group’s lower-than-expected earnings were attributed  to:  i)  a  weaker  showing  in  Malaysia  caused  by  the  temporary  closure  of three performing stores for major renovations in 1H13,  and ii) lower operating profit from China (-71% y-o-y) due to weaker consumer sentiment, increasing competition especially in the e-commerce operation, the impact of losses incurred by new stores, as well as the temporary closure of its Shanghai flagship store for renovation works .Thus, we downgraded the stock to  SELL  from Neutral,  as we believe its share price may continue to underperform in view of its  weak numbers and a lack of immediate re-rating catalysts.

Plastic  and  packaging.  Daibochi  Plastic  &  Packaging  (Daibochi)  reported  FY13 results  that were spot  on, while  SKP Resources and Johore Tin’s  results  fell short of expectations. Daibochi came out on  top with its  FY13 net profit increasing  by 12.9% y-o-y, while SKP Resources’  9MFY14 and Johore Tin’s FY13 net profit  declined  by 44.5% and 6.9% y-o-y respectively. Due to  the  overall  softening consumer demand and  an  expected  increase  in  raw  material  prices,  the  packaging  industry  outlook remains murky in the near future. All in, we are negative on this sub-segment.

Brewery sector lacks spark

Good quarter for beer boys.  In this reporting season, Guinness   Anchor (Guinness) reported  results  which  were  in  line  while  Carlsberg  Brewery  (Carlsberg)  trumped expectations. During the quarter, both companies posted strong financial numbers, thanks to higher beer sales volume  driven by  pre-Budget 2014 speculation and early Chinese  New  Year  (CNY)  celebrations  this  year.  The  key  highlights  for  Guinness were:  i)  its  newly-launched  beer,  Tiger  Radler,  gained  good  traction  and  has  met internal expectations so far, ii)  over  the next 3-6 months,  it will be extending another core brand as well as introducing a new premium brand into the market, and iii) its traditional on-trade sales have come under pressure lately but its modern on -trade sales continue to thrive. For Carlsberg, we gathered that: i) its cost-savings initiatives helped  lift  its  4Q13  bottomline,  ii)  its  iconic  Green  Label  brand  chipped  1-3%  off Guinness’  market  share,  and  iii)  its  premium  beer  segment  gained  ~10%  market share  over  the  past  two  years.  Overall,  beer  demand  in  2013  was  weak  (sales volume:  +0-1%  y-o-y)  due  to  cautious  consumer  spending  and  easy  access  to contraband beer.

Gloomy  2014  for  brewers.  In  the  domestic  beer market, we  expect  2014  to  be a challenging year for brewers as consumers/drinkers  adopt cautious  spending habits amid the rise in cost of living. We are of the view that beer consumption may  decline by 5% this year but grow by 1% in 2015, as we believe consumers would have grown accustomed  to  the  higher  cost  of  living  by  next  year  and  would  start  spending  on discretionary  items  again.  Meanwhile,  in  Singapore,  the  operating  environment  is competitive given that there are more than 100 legal brands in the market. Also, the recent 25% beer excise duty hike may dampen alcohol consumption as brewers pass on higher costs to consumers.

UNDERWEIGHT.  We  maintain  our  SELL  recommendations  on  Guinness  and Carlsberg,  with FVs of MYR13.49 and MYR11.55 respectively.  We are still negative on both stocks given their rich valuations and waning dividend yield appeal.Cigarette sales to come under pressure

A  subdued  quarter.  In  the  cigarette  space,  the  results  of  both  British  American Tobacco (BAT)  (ROTH  MK, SELL, FV: MYR54.76)  and JT International (JTI)  (RJR MK, NEUTRAL, FV: MYR6.27) were within expectations. As usual, 4Q  was  typically weak following  retailers’ stockpiling efforts in 3Q, prior to  the  Budget announcement. However, after two years without an excise duty hike, the Government raised the rate by  14%  (MYR0.60/pack)  in  September  last  year.  Consequently,  BAT  and  JTI increased their cigarette prices by MYR1.50/pack in October, causing  sales volume to  decline  by  18-21%  q-o-q/y-o-y.  To  our  surprise,  BAT’s  quarterly/yearly  sales volume declined at a much faster pace  (~1-4%) compared with  JTI.  The latter, which has  stronger  exposure  in  the  value-for-money  (VFM)  segment,  showed  more resilience to the rate hike. Meanwhile, illicit cigarette trade accelerated to 39% in OctDec  2013  from 34% in June-Aug. Overall, cigarette sales volume declined 6% y-o-y last year.

A  smoky  2014.  We  expect  cigarette  sales  volume  to  continue  to  come  under pressure this year, fuelled by  a  steep price increase and  the  substitution  of  cheaper illicit cigarettes, which cost half the price of legal ones. For now, we  project  industry volume to contract 10% y-o-y in 2014.

UNDERWEIGHT.  Similar to brewers, we reiterate our SELL call on BAT on the back of  the stock’s  rich valuations and waning yield appeal. However, we are NEUTRAL on JTI  despite the stock  trading at a steep P/E discount of over 70% against  BAT. We see no immediate re-rating catalysts on the horizon, given that cigarette players are operating in a mature industry with limited growth opportunities.

Source: RHB