• Maintain NEUTRAL, Top Picks: Mr DIY, Guan Chong and Heineken Malaysia. 3Q22 sector results beat estimates for the third straight quarter, as consumer spending remained robust despite the seasonal softness. In view of the potential headwinds ahead, we prefer companies with defensive domestic-driven businesses, sound expansion plans and strong pricing power which will enable them to deliver sustainable growth from the economic reopening-induced and elevated FY22F earnings base.

• Outlook. Whilst we expect consumer spending to remain largely resilient in FY23, underpinned by economic growth and stable employment markets, the growth momentum may cool down, in view of the absence of spending boosters – Employees Provident Fund withdrawals, loan moratoriums, low interest rates, high commodity prices (ie CPO) and pent-up demand. Externally, a deep global economic slowdown is a major risk, whereas internally, regulatory or policy changes such as the re-introduction of the Goods and Services Tax and subsidy rationalisation will have material knock-on effects on consumer spending.

• 3Q22 sector results are above estimates, ie a third beat in a row. Out of 13 companies under our coverage which have reported 3Q22 results, six outperformed, four were within expectations and three disappointed. By and large, most of the positive surprises were driven by more robust-than- expected consumer spending, notwithstanding the softer seasonality in 3Q22 – benefitting consumer discretionary firms. In addition, we saw both the two poultry companies under our coverage, QL Resources and Leong Hup International, booking stronger-than-expected earnings, partially due to government subsidies given as a result of ceiling price enforcement.

• 3Q22 sector revenue surged 33% YoY but was flat QoQ. On revenue, all companies recorded strong YoY recoveries as 3Q21 was a low base (being dragged by lockdown measures then). Meanwhile, quite a few consumer retail players recorded sales declines QoQ – which is not surprising, in view of the exceptionally strong 2Q22 and the seasonally weaker 3Q22 on the lack of festivities. Consumer staples or food producers have continued to see cost pressures crimping margins, on the back of elevated commodity prices and compounded by unfavourable FX rates. We made no change to our stock recommendations during the quarter.

• Top Picks. We expect Mr DIY’s earnings to rebound on the margin recovery, while we also like its robust expansion plan and entrenched network to capture consumer spending. Meanwhile, Guan Chong’s current valuation is attractive, with earnings expected to inflect from FY23 onwards, primarily on progressive contributions from its Ivory Coast venture. Heineken Malaysia is our preferred pick in the brewery space, due to its cheaper valuation and market leadership in Malaysia.

• Downside risks include unfavourable regulations or policy changes and a major slowdown in the global economy. The opposite circumstances would present upside risks.

Source: RHB Research - 8 Dec 2022