• Maintain NEUTRAL with Top Picks: Mr DIY, Power Root, Guan Chong, and DXN. Whilst we expect consumer spending to remain resilient, the exceptional 2022 base boosted by reopening of the economy may render the 2023F spending growth unexciting. Moreover, consumer sentiment is likely to stay soft given the uninspiring income outlook and inflationary pressures. Risks to our sector call include better/worse-than-expected global economy growth and higher/lower-than-expected input costs.

• Unfavourable high base effects to kick in. The sector staged a sharp rebound in 2Q22 thanks to the “revenge spending” and pent-up demand post economy reopening. This was further aided by the special withdrawal from the Employees Provident Fund, whilst the elevated CPO prices also lifted the rural spending. Hence, consumer companies may find it difficult to grow from or even match last year’s base. The release of 2Q23F results may prompt the consensus to tone down the optimistic earnings forecasts that were, to a certain extent, built on the positive earnings momentum in the past few quarters.

• Soft consumer sentiments likely to persist…. According to the Malaysian Institute Of Economic Research, the consumer sentiment dipped below the optimism threshold in 1Q23, suggesting a more cautious mood amongst the consumers. This could be due to the anticipation of an uninspiring income outlook amidst the slowdown in global economic growth ahead. In addition, the lower disposable income - as a result of heightened inflationary pressures and rising interest rates - is also a key sentiment dampener. Going forward into 2H23F, we believe the sentiment may remain subdued as the aforementioned challenges are likely to linger.

• … leading to more cautious spending patterns. Therefore, we expect consumers to be more price sensitive when making spending decisions. This should propel more downtrading tendencies as consumers get more inclined to seek value and be more attracted to price promotions. With this, we believe retailers - including Mr DIY and Padini with value-for-money proposition - can benefit as both offer decent products with competitive pricing, thanks to business scale on the back of solid market shares in respective industries. Meanwhile, Mr DIY in particular, shared its intention to be more aggressive with its promotion initiatives, leveraging on the cost savings from the fall in international freight rates.

• Stock picks. Against the backdrop of an unexciting consumer spending and rising operating costs, we prefer companies that have more visible earnings outlook and are less susceptible to cost pressures. We like: i) Mr DIY with cost tailwinds and sustainable outlet expansion to drive earnings growth, ii) Power Root given the solid sales traction and generous dividend pay-out, and iii) Guan Chong as we look forward to the maiden contribution from Ivory Coast. We recently initiated coverage on DXN as we believe its regional expansion and proven business model will continue to drive sustainable growth.

Source: RHB Securities Research - 21 Jul 2023