• Top Picks: Mr DIY Group, Heineken Malaysia, Focus Point, DXN Holdings and Mynews. 1Q24 sector results met expectations thanks to robust topline growth and improving profit margin. The introduction of the Employees Provident Fund’s (EPF) Account 3 and pay raises for civil servants are effective measures to support consumer spending. In addition, the pickup in tourist arrivals should benefit the consumer retail players. On the flip side, the uncertainty on inflationary impact of subsidy rationalisation will remain a key concern for the sector. Maintain NEUTRAL.

• 1Q24 sector results in line with expectations. Within our coverage, eight companies reported earnings within expectations, four surprised on the upside and one disappointed ie Padini – dragged by aggressive price discounts and rise in staff costs. With 1Q24 capturing the festive demand of the Lunar New Year and Aidil Fitri, all companies under our coverage, except Nestle, recorded robust YoY topline growth. QoQ momentum was also largely positive particularly for the consumer discretionary players, lifted by the favourable seasonality. Meanwhile, there was a healthy GPM expansion for most of the consumer staples companies including Farm Fresh, Nestle, and QL Resources, largely driven by easing input costs.

• Key observations. The general feedback we gathered from corporates is that consumer sentiment has remained subdued given heightened inflationary pressures. This continued to give rise to downtrading behaviour as pricesensitive consumers constantly sought or hunted for value. The key concerns of corporations include the upcoming implementation of subsidy rationalisation for petrol, FX risks, commodity market movements and geopolitical risks. During the quarter, we upgraded Leong Hup International to BUY, as we foresee stronger earnings momentum ahead of improving market conditions in the Indonesian and Vietnamese markets.

• Sector Top Picks. Mr DIY is a prime beneficiary to capitalise on EPF’s flexible withdrawal scheme and salary hikes of civil servants given its entrenched network of stores and value-for-money product offerings. We highlight Focus Point for its industry-leading growth underpinned by effective marketing initiatives and rising myopic population. DXN’s valuation is undemanding considering the steady earnings growth whilst dividend yield is attractive at c.6%. We also like Mynews as we believe the robust growth of the Mynews brand and anticipated turnaround of the CU brand could trigger a valuation rerating.

• Risks to our recommendation include drastic subsidy rationalisation and a sharp rise in commodity prices. 

Source: RHB Securities Research - 19 Jun 2024