Review of 1HFY24

GDP growth in 2023 normalised to 3.7% following a strong growth of 8.7% in 2022. Despite this, GDP growth in 1QCY24 rose to 4.2% yearon-year (YoY) thanks to robust private consumption, a recovery in exports, and increased investment activities. Private consumption in 1QCY24 grew by 4.7% YoY, compared to 4.2% YoY in 4QCY23 (Figure 1). These positive indicators suggest a steady pace of economic growth driven by higher household spending, supported by favourable labour market conditions and enhanced government measures.

Overall, the KL Consumer Product Index (KLCSU) underperformed the FTSE Bursa Malaysia KLCI index (FBMKLCI) by 3.7pts to 5.6% (Figure 2).

NESTLE, which has consistently underperformed FMBKLCI recorded a YoY decline in net earnings due to a slowdown in domestic demand (Figure 3). During 2QCY23, most retailers outperformed the broader market, except for PADINI, which saw a 26.9% YoY decrease in core earnings, attributed to increase operating and input costs (Figure 4). Notably, many retailers have performed better YTD than the broader market, largely driven by festive season activities.

In 1QCY24, NESTLE, which has consistently underperformed the FMBKLCI, reported a YoY decline in net earnings due to a slowdown in domestic demand (Figure 3). During 2QCY24, most retailers outperformed the broader market, except for PADINI, which saw a 26.9% YoY decrease in core earnings, attributed to increase operating and input costs (Figure 4). Notably, many retailers have performed better YTD than the broader market, largely driven by festive season activities.

Meanwhile, industrials showed contrasting performance. SCIENTEX outperformed the FBMKLCI, whereas POHUAT closely tracked behind the index, possibly due to elevated operating expenses that offset improved sales performance (Figure 5). In the breweries sector, despite CARLSBG (+3.4% YoY) and HEIM (+11.4% YoY) posting robust earnings growth, the sector underperformed the FBMKLCI in 1QCY23 (Figure 6).

2HCY24 Outlook

Retailers: Salary Hike for Civil Servant & Flexible Withdrawal of EPF

Account 3 Lead to Higher Disposal Income

Malaysia registered higher GDP growth in 1QCY24 driven by stronger private expenditure and positive turnaround in exports. According to Bank Negara Malaysia (BNM), household spending will continue to anchor growth, supported by sustained employment, increased tourist arrivals, and improved income levels, which will bolster household expenditure.

Consumer expenditure bucked the softening trend and increased QoQ, with household spending grew by 0.5%-pts to 4.7% in 1QCY24, supported by growth in private sector nominal wages. As reported by BNM, the private sector nominal wages index rose 0.1pts to 108.0. Furthermore, the labour market remains resilient, with the unemployment rate holding steady at a pre-pandemic level of 3.3% in 1QCY24 (QoQ, 4QCY23: 3.3%; YoY, 1QCY23: 3.5%).

It is worth noting that labour supply and demand remains healthy, with employment increasing to 16.40mn people in 1QCY24 (vs. 4QCY23: 16.35mn people) in 1QCY24, while the labour force participation rate recorded a historical high of 70.2% in 1QCY24 (vs. 4QCY23: 70.1%). Additionally, we anticipate household spending to remain resilient in the second half of CY24, supported by a salary adjustment of up to 13% for civil servants effective December 2024, amidst stable labour market conditions.

To mitigate the increased cost of living following subsidy rationalisation, flexible withdrawals from EPF account 3 were introduced to alleviate the adverse effects. As a result, we anticipate AEON's growth to continue in FY24, driven by its expanded product offerings and the convenience of its neighborhood mall concept. Meanwhile, Padini, known for competitive pricing, stands to benefit from higher disposable incomes, encouraging increased consumer spending in a cash-rich environment.

F&B: Stabilisation in Food Commodities

In 2023, Food and Agriculture Organisation (FAO) Food Price Index has declined gradually to 124.7-pts yet at the high side (Figure 7). However, the index has been on a downward trajectory since reaching its peak in 2022 at 144.7 points and averaged 120.4-pts in May 2024. The index saw a slight increase of 1.1-pts (+0.9% MoM), driven by increase in the cereal and dairy indices.

For 2HCY24, we anticipate that prices of food commodities will stabilise at current levels. Looking forward, dairy prices are expected to hold steady due to strong demand, despite anticipated decreases in production alongside seasonally lower yields.

With food prices overall stabilizing from their peak (Figure 9-18), F&B players are expected to enhance their gross margins in 2HCY24. This improvement is anticipated to be supported by: i) lower input costs, ii) salary increments and flexible withdrawals from pension fund leading to increased disposable income, and iii) improved tourist arrivals.

Industrials: Ringgit Weakening Expected to Benefit Exports

Ringgit remains weak as it continues to resist falling below the RM4.70/USD threshold (Figure 19). Based on 6MFY24, ringgit is trading at an average of RM4.72/USD and our in-house estimate for Ringgit in FY24 has been revised to RM4.65 from RM4.45 previously. Our in-house stance remains cautiously optimistic that the Ringgit will gradually appreciate, buoyed by sustained progress in domestic economy and potential interest rate cuts by the Federal Reserve. Export-oriented industrial firms such as SCIENTEX and POHUAT are expected to maintain profitability in the 2HCY24, benefiting from export

Breweries: Top line remains resilient albeit price hike in April 2024

Effective April 2024, beer prices have been lifted by approximately 5% to 8%. The price adjustment was 2 years after the price hike of 6% in 2022. Rationale behind the price hike was the rising raw materials and operational costs. We believe demand would sustain driven by the improved tourist arrivals and Euro Cup 2024, albeit higher price of beers.

Based on our previous report on breweries performance during major soccer events, we estimate that global consolidated beer volumes are comparable to those of past soccer events. Therefore, sales growth in the 2HFY24 is expected to respond favourably to the recent price adjustment, along with sustained beer volumes. Moreover, we anticipate that tourist arrivals and increased out-of-home consumption will also contribute to the sales growth of breweries.

Recommendations

We reiterate our Overweight stance on the consumer sector. The stable employment market, increased disposable income from EPF’s flexible account, and a salary revision exceeding 13% for civil servants are anticipated to bolster demand for consumer products. According to the most recent data, tourist arrivals surged by 32.5% YoY to reach 5.8mn individuals in 1QCY24. As a result, we anticipate that demand growth will be further driven by increased out-of-home consumption.

We believe the growth of the Consumer sector in the 2H of CY24 will remain intact, supported by: i) robust tourist arrivals, ii) increased disposable income due to salary increases and the flexibility to withdraw from EPF account 3, and iii) stable commodity prices. However, the recalibration of fuel subsidies may exert downward pressure on consumers' disposable income, driven by rising living expenses. Therefore, our top picks in the sector are ABLEGLOB (TP: RM2.57) and FFB (TP: RM1.97).

We like ABLEGLOB due to the following reasons: i) repeat sales orders from existing and new customers, ii) aiming for a 40% to 45% utilisation rate in FY24 (FY23: 20%), and iii) a dividend payout ratio of at least 35% for 5 consecutive years. We arrived at a TP of RM2.57/share based on a CY25 PE of 7x for manufacturing and 14x for F&B segment. Maintain Buy. Potential downside risks for the stock include i) unfavourable uptick in commodity prices, particularly skim milk powder, and ii) strengthening of the RM/USD as the main revenue stream is export oriented.

Additionally, we favour FFB due to its i) wider products offering at distinct pricing range, ii) stable input costs and iii) a favourable margin from the ice cream segment in FY25. Maintained Buy on the stock with a TP of RM1.97/share based on 25x CY25 EPS. Potential downside risks include i) surge in raw material prices and ii) weaker-than-expected consumer sentiment as a result of the implementation of fuel subsidies, which is likely to occur in 2HCY24.

Source: TA Research - 2 Jul 2024