KUALA LUMPUR (Sept 10): Consumer stocks are expected to post softer quarter-on-quarter (q-o-q) results in 3Q2024, as weak consumer sentiment seen in 2Q2024 is expected to persist, said CIMB Securities.

The July-September quarter is also seasonally weak due to lack of festivities, said CIMB Securities, who maintained a “neutral” call on the sector in a note on Tuesday.

“We also see limited rooms for price hikes at this juncture, with any price adjustments to account for higher input costs, as consumer companies are cognisant of the weak consumer-spending patterns,” it said.

In the recently concluded 2Q2024 results season, consumer companies saw weaker-than-expected sales on weak sentiment and boycotts, with those beating earnings forecast  benefitting from higher-than-expected margins instead.

For the medium term, catalysts include a civil service salary hike from December, CIMB Securities said. This, some suggest, hints towards potential increase in private sector minimum wage as well.

In this scenario, the overall impact of consumers’ higher purchasing power “will more than offset the increase in labour costs,” said the research house.

“We also believe that the elevated consumer spending power will also shift sales mix to more premium products (less downtrading activities), leading to a more profitable sales mix for consumer companies,” it said.

Stronger ringgit is also positive for those with imported feedstocks and goods, it said.

However, there will be a lagged impact as companies may have hedged forward raw material requirements or currency needs, while inventory days of retail companies are typically between three- to five months, it added.

CIMB Securities’ consumer sector top picks include Farm Fresh Bhd (KL:FFB) with target price (TP) of RM1.95, amid expected margin improvements and diversification of dairy products into more profitable segments like ice cream and growing-up milk.

It also likes Mr DIY Group (M) Bhd (KL:MRDIY) (TP: RM2.45) as a key beneficiary of consumer downtrading due to soft consumer sentiment, whereas Aeon Co (M) Bhd (KL:AEON) (TP: RM1.57) is on the list due to rejuvenation of existing malls and commencement of two new malls in 2024-2026.

All three companies are expected to see robust topline growth, and trading at a discount to historical average valuation multiples, CIMB Securities said.

At the time of writing on Tuesday, Farm Fresh traded unchanged at RM1.69, for a market capitalisation of RM3.17 billion. Mr DIY shares rose two sen or 1.01% at RM2.01, for a market capitalisation of RM19 billion; whereas Aeon shares slipped one sen or 0.7% to RM1.41, valuing the retailer at RM1.98 billion.

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