• Maintain NEUTRAL; Top Picks: Mr DIY, Guan Chong, Heineken, DXN and Focus Point. 4Q23 sector results missed expectations on cautious consumer spending but we see GPM recovery aiding several food producers thanks to easing commodity prices. Despite the unexciting consumer spending and potential inflationary impact arising from subsidy rationalisation and new consumption taxes, we believe the current sector valuation may have largely priced in the downside risks and our base case does not assume the subsidy rationalisation to significantly dampen consumer spending.

• 4Q23 results roundup. 4Q23 sector results missed expectations with discretionary spending dampened by cautious consumer sentiment stemming from heightened inflationary pressures. Consumer staple companies continued to enjoy resilient demand whilst GPMs saw benign expansion, primarily on receding input cost pressures in tandem with easing commodity prices. During the quarter, we downgraded QL Resources (on valuation grounds) and Padini to NEUTRAL from Buy after the disappointing results. On the flipside, we upgraded Power Root to NEUTRAL from Sell as we believe the worst is over and valuation has priced in most of the negatives.

• Outlook. While we foresee consumer spending remaining unexciting going forward as income levels take time to catch up with the costs of living, the healthy employment market and continuous government aid to the lower income groups should underpin the overall consumer spending and demand for staple necessities. On the other hand, the strong recovery of tourist arrivals will be a boon to the sector and should benefit the breweries and consumer retail companies, in our view. Also, the introduction of Account 3 by the Employees Provident Fund allowing the flexibility in withdrawal could boost discretionary spending amongst the locals. Still, we believe the sector sentiment will stay muted until more clarity can emerge on the implementation of various subsidy rationalisation measures and new consumption taxes for investors to gauge the potential inflationary impact.

• Top Picks. We continue to like Mr DIY for its strong fundamentals to deliver growth amidst the challenging environment. We highlight Guan Chong as strong demand has driven up the ASPs and that should also limit the markedto-market hedging loss going forward. Meanwhile, we expect Heineken Malaysia to benefit from rising tourist arrivals – its valuation is undemanding with decent dividend yield. DXN is trading at a modest valuation despite delivering consistent earnings and dividend thanks to its effective business model. Lastly, Focus Point should continue to deliver robust growth supported by the rising myopic population – we look forward to a sustainable turnaround of its F&B business.

• Risks to our recommendation include worse-than-expected subsidy rationalisation measures, and a slowdown in the global economy.

Source: RHB Securities Research - 25 Mar 2024