• Top Picks: Mr DIY, DXN Holdings, Heineken Malaysia and Guan Chong.Investor sentiment on sector should remain muted until there is more clarityon the impact of the subsidy rationalisation. That said, we believe consumerspending, while unexciting, will be supported by the stable employmentmarket and continued government assistance given to the lower-incomegroups. Current valuations may have largely priced in the downside risks andour base case does not assume that the subsidy rationalisation willsignificantly dampen consumer spending. Maintain sector NEUTRAL.

• 2024 outlook. After an underwhelming 2023 when sentiment on the sectorwas dented by an unfavourable base effect and erosion in consumer spendingpower, we believe investors’ key concerns will continue to revolve aroundthe inflationary risks arising from reform measures including the subsidyrationalisation and consumption taxes. As a result, our economists areprojecting a modest 2024 private consumption growth of 3.3% YoY and apick-up in inflation to 3.3%. With that, consumer sentiment should remainsubdued – translating to lacklustre sales volume growth for most of theconsumer companies we cover. This environment would also cap any ASPgrowth, so we believe there will be limited headroom for GPMs to expand.

• Subsidy rationalisation may not be all negative. Notwithstanding theuncertainty on the subsidy rationalisation, we are not turning negative on thesector, as the depressed sector P/E (Figure 1) indicates that the downsiderisks are in the price. Our base case also does not assume an overly bearishscenario where the reduced subsidy would significantly hurt consumerspending. This is premised on the continued assistance extended by theGovernment to lower-income earners and relatively inelastic demand in thehigher-income group. Also, a targeted approach that is likely to be adoptedmay end up having the effect of a cash transfer from the latter to the former,which has a higher marginal propensity to consume. This should benefitplayers like Nestle, Mr DIY, Farm Fresh and Padini. Furthermore, a strongerfiscal position from the reform initiatives could give the Government betterleeway in reviewing the salary scheme for civil servants (which is ongoing). Apositive outcome could serve as a major catalyst to boost consumer spending.

• Top Picks. We continue to like Mr DIY for its value-for-money productofferings and sticky demand, which should underpin its robust earningsgrowth above the sector average as well as its continuous networkexpansion. We also like DXN Holdings for its attractive valuation and excitinggrowth prospects, with its imminent entry into the Brazil and Argentinamarkets. Guan Chong may see a strong turnaround in FY24F on a potentialnormalisation of cocoa bean prices. We also like both the breweries for theirundemanding valuations and c.6% dividend yields, backed by relativelyinelastic demand for their products.

• Downside risks to our sector weighting: More severe-than-expected reformmeasures and a sharp rise in operating costs. The opposite scenarios wouldconstitute upside risks.

Source: RHB Securities Research - 30 Jan 2024