KUALA LUMPUR (July 4): Hong Leong Investment Bank (HLIB) has turned more positive on the consumer sector, upgrading its call to "overweight", from "neutral", due to potential margin expansion from lower raw material prices and consumption boosts from the Employees Provident Fund (EPF) Account 3 and civil servant pay hikes.

Additionally, a stable macro environment with consistent employment and rising retail spending supports this view, said the research house.

HLIB's top stock recommendations are AEON Co (M) Bhd (KL:AEON)  ("buy", target price [TP]: RM1.82), Focus Point Holdings Bhd (KL:FOCUSP) ("buy", TP: RM1.14), and QL Resources Bhd (KL:QL) ("buy", TP: RM8.18), each offering attractive valuations bolstered by robust earnings from expansion plans and solid brand equities.

Notably, it said earnings for the first quarter of calendar year 2024 (1QCY2024) were largely in line with estimates despite the traditionally slow period.

Among its coverage, AEON exceeded expectations due to high festive spending and margin expansion. In contrast, Berjaya Food Bhd (KL:BJFOOD) underperformed, mainly dragged down by an ongoing boycott of Starbucks, causing a significant drop in sales, HLIB said in a note on Thursday.

Raw material prices have stabilised overall, benefiting food and beverage (F&B) players with potential margin recovery.

"With the exception of cocoa and coffee beans, the prices of key commodities continue to chart downward trends", which bodes well for companies like Nestle (Malaysia) Bhd (KL:Nestle), which recorded a 0.5 percentage point year-on-year (y-o-y) increase in earnings before interest, tax, depreciation and amortisation (Ebitda) margin despite a 3% reduction in sales.

It noted that Panasonic Manufacturing Malaysia Bhd (KL:PANAMY) has also seen a stabilisation in raw material prices, though copper remains an exception, citing a recent meeting with Panasonic that confirmed the possibility of another price increase for its copper-heavy products.

Government initiatives introducing EPF Account 3 and a civil servant pay hike, effective December 2024, will act as significant disposable income boosters, said HLIB.

"Having exited the pandemic for over two years, we believe that the expected EPF withdrawals could see a higher proportion directed towards discretionary spending," it added.

The highly liquid nature of Akaun Fleksibel could lead to a lasting increase in consumer spending patterns, it added.

Mid-to-high-end F&B and retail operators providing discretionary goods and services are expected to benefit the most. Companies, such as Focus Point, MR DIY Group (M) Bhd (KL:MRDIY) with its low-ticket items, and AEON, catering to mass-market customers, are well positioned to capitalise on this increased consumer spending, according to HLIB.

The overall macro environment continues to be encouraging, with stable employment levels at 3.3% as of April 2024 and a 7.1% y-o-y increase in retail spending as of March 2024, it noted.

Citing data from BMI, a Fitch Solution company, HLIB said household spending in Malaysia is forecast to grow by 5% y-o-y to RM903.8 billion in 2024.

This growth will bring consumer spending back to pre-Covid levels seen between 2015 and 2019.

HLIB has adjusted its valuation year for AEON from financial year 2024 (FY2024) to FY2025, increasing its target price from RM1.60 to RM1.82 based on an unchanged 15 times price-earnings (PE) multiple.

"We are confident in AEON's strategy to maintain competitiveness through store rejuvenation and expansion, while preserving margins by optimising product offerings," said the research house.

The property management services segment is also expected to benefit from the completion of four refurbished malls by the end of the third quarter of this year, it added.

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