• Top Picks: Mr DIY, DXN, Guan Chong, and Heineken Malaysia. 3Q23F earnings should showcase more evidence of cautious consumer sentiments on the back of heightened inflationary pressures and eroded disposable income. This, together with the inflationary risks arising from reform measures, ie subsidy rationalisation, could have been largely priced into the valuations. On the flipside, stable employment market and continued government financial aids to lower-income groups should support consumer spending. Maintain NEUTRAL.

• A soft quarter expected. The subdued consumer sentiment and cautious spending should persist in 3Q23F, a relatively quiet quarter seasonally with the absence of major festivals and lengthy holidays. Hence, topline growth should be unexciting, from the high 3Q22 base boosted by the postpandemic economy reopening. Meanwhile, we believe the rising operating costs will continue to eat into margins. The risk of earnings disappointments could be more prevalent in the consumer discretionary sub-segment as consumers may have reduced non-essential spending. On the flipside, LHI (LHIB MK, BUY, TP: MYR0.72) could surprise on the upside, considering the sustainable turnaround in Indonesia and easing of feed costs.

• Consumer boycotts arising from geopolitical tensions. This will likely have a negative impact on Nestle (NESZ MK, NEUTRAL, TP: MYR134) and Starbucks under Berjaya Food (BFD MK, NEUTRAL, TP: MYR 0.77). That said, past instances suggest minimal earnings or share price impact (refer Page 3), if any. Nonetheless, we believe the boycotts may hurt Starbucks more than Nestle. This is considering the difference in demand nature and competition landscape – the former’s products are largely discretionary in nature and is in a more competitive market where alternatives are easily available, whereas Nestle products are predominantly staple food and enjoy prominent market shares in most of the product segments occupied. Currently, we make no changes to our earnings forecasts, pending further development and management guidance.

• Top Picks. We continue to like Mr DIY for its visible near-term earnings trajectory underpinned by cost tailwinds and solid demand. DXN is trading at attractive valuation despite the robust earnings growth and sector-leading profit margins on offer. Guan Chong’s forward-selling mechanism, coupled with strong sales channel and multi-national corporation clientele, should continue to support its solid earnings base. Heineken is our preferred pick in the brewery space, considering the positive market share traction and relatively cheaper valuation.

• Risks to our recommendation include stronger/weaker-than-expected consumer sentiments and major slowdown/surge in domestic and/or global economies.

Source: RHB Securities Research - 10 Nov 2023