• Top Picks: Mr DIY, Berjaya Food, Heineken Malaysia, Mynews, Guan Chong. Our base case assumes a broad-based recovery in consumer spending in FY22, underpinned by the sustainable, effective containment of COVID-19. That said, large-cap stocks are still trading at rich valuations, so investors may not have too many options or levers to capitalise on. Meanwhile, we see more opportunities in the small- to mid-cap space – particularly those with promising expansion plans to drive earnings growth beyond recovery, and back to the pre-pandemic base. Maintain NEUTRAL.

• Outlook. We expect the exciting headline numbers to taper off from the high base, taking into account the resurgence of COVID-19 infections amidst the spread of the more contagious new variant. That said, we believe both consumers and businesses should be better prepared to manage the new wave, in view of the high vaccination rates and experience accumulated over the past two years – and this is on top of the Government’s approach to achieve endemicity. Meanwhile, we expect more cost pass-throughs to be implemented, since commodity prices and operating expenses have remained elevated. Rising costs and labour constraints should be major sector headwinds, and prudent cost controls and the efficient allocation of resources will be essential in mitigating these challenges.

• 4Q21 results were below expectations. Of the 12 companies under our coverage that reported 4Q21 results, only two met estimates. Meanwhile, five disappointed – mainly in the staple food space, ie Leong Hup International, Nestle, Power Root, QL Resources and Carlsberg. Five players did bring about an upside surprise, ie British American Tobacco, Heineken Malaysia, AEON, Berjaya Food, and Padini – with most of them coming from the consumer discretionary sub-sector. As most of the disappointments came from the large-cap stocks, we consider 4Q sector results as below expectations, from a market capitalisation weightage standpoint. This was largely caused by the sharp hikes in commodity prices across the board, and exacerbated by the higher transportation or freight costs on the back of a container shortage and the rise in oil prices.

• Sector picks. We still like Mr DIY for its gravity-defying growth, underpinned by sound fundamentals and, as such, the potential for a further valuation re-rating. We like Heineken Malaysia as our preferred choice in the brewery space, due to its market leadership and robust sales growth momentum. Berjaya Food and Mynews are our cyclical picks, and we expect them to benefit from the reopening of international borders as well as the unrestricted operating hours. Both companies also have promising expansion plans. We view Guan Chong as a proxy for the economic recovery in play, and it is trading at below the sector’s average valuation. We have also highlighted a few recovery plays, including Focus Point (FPHB MK, NR), Kawan Food (KFB MK, NR) and Innature (INNATURE MK, NR).

Source: RHB Research - 17 Mar 2022