While near-term headwinds on consumer spending remains following the removal of diesel subsidy and impending RON95 fuel subsidy rationalization, we foresee a gradual improvement in consumer sentiment on the back of higher disposable income. However, we believe that the positives will mainly benefit consumer staples instead of consumer discretionary segment, given the defensive nature of essential goods. We also expect better profit margins on lower key commodity prices, with the exception of cocoa and coffee beans. We reiterate our Overweight stance on the consumer sector with Able Global and Magni as our preferred picks.

• Higher consumption. We expect consumer spending to improve going forward, on improved labour market conditions mainly premised on a recovery in manufacturing sector given the improved demand for electronics and electrical (E&E) products. In addition, higher consumer disposable income on salary adjustment and EPF withdrawals as well as a recovery in international tourists should help to boost retail spending.
   
• Subdued demand for discretionary products. However, demand for discretionary products will likely to remain weak, on macroeconomic headwinds, elevated cost of living as well as concerns over fuel subsidy rationalization. This may lead to downtrading activities among price sensitive consumers, which could potentially benefit DKSH, given its wide array of consumer goods in its product portfolio.
   
• Valuation and top picks. All in all, we remain our Overweight call on the consumer sector as we expect domestic demand to be fuelled by private consumption, given the stable job market, recovery in the tourism industry as well as better consumer disposable income. We believe that this will benefit the consumer staples with better earnings visibility as spending on essential goods will likely be prioritised. Our preferred picks are i) Able Global, as we expect stronger contribution from its Mexico operations supported by robust demand for dairy products. ii) Magni-tech (Magni) on greater athleisure sales given consumers’ focus on sports and wellness as well as its attractive valuation, trading at an average forward PER of 8x, representing a 40% discount to our sector’s average of 14x.

Private Consumption to Further Ignite Domestic Demand

Given the robust GDP growth in 1Q24 and several growth catalysts in place, we maintain our 2024 full-year forecast at 4.7% YoY (official forecast: 4.0-5.0%). The anticipated RM20bn (1% of GDP) annual withdrawals from EPF Account 3 are expected to provide consumers with additional disposable income, boosting private consumption and retail sales. As of the latest data, 27.8% of the total 13.01mn EPF members under 55 have withdrawn RM7.81bn from the Flexible Account. Should all members opt for a one-off transfer from Account 2 into Account 3, RM57bn could be transferred. However, this impact will likely be smaller than the RM145bn from previous withdrawal schemes during the Covid-19 era.

Additionally, the Prime Minister announced a salary adjustment of over 13% effective Dec 2024, the highest hike to-date, costing the government RM10bn annually. This will raise the minimum monthly income of civil servants above RM2,000 (currently RM1,765). However, we opine that progressive implementation of this adjustment could have a more manageable impact on the fiscal position compared to a one-off hike.

Malaysia's economic resilience is expected to continue, driven by strong domestic demand amid global uncertainties. Private consumption, accounting for around 60% of GDP, will likely remain the primary growth driver, supported by a robust labour market, rising incomes, and increased tourism. We anticipate private consumption to grow by 5.6% YoY in 2024, surpassing the 4.7% growth seen in 2023.

In May, the World Semiconductor Trade Statistics (WSTS) has revised its global semiconductor market growth forecast upwards to 16%, exceeding the previous estimate of 13.1%. For 2025, WSTS anticipates a growth rate of 12.5%, bringing the market to an estimated US$687bn. This optimistic outlook is particularly significant for Malaysia's manufacturing sector, where E&E exports account for over 40% of total exports. As the 10th largest global exporter of E&E products and the 6th largest exporter of semiconductors in 2023, Malaysia is poised to benefit substantially from these favourable projections. Malaysia accounts for 7% of global semiconductor trade and 13% of back-end operations.

Consumer sentiment cooled by 2.3 points to 87.1 points in March 2024, as consumers remained wary of persistent inflationary pressure. We expect consumer sentiment to improve slightly in 2HCY24 but remain below the optimism threshold of 100 points, driven by stronger export demand for electronics and electrical products and a recovery in international tourism.

Despite robust growth projections, Malaysia's economic trajectory faces significant downside risks. Global economic slowdowns and escalating geopolitical tensions threaten export performance. Domestically, unforeseen disruptions in commodity production due to adverse weather or extended maintenance could exacerbate vulnerabilities. A sluggish recovery in external demand from key trading partners like China, coupled with geopolitical uncertainties, may exert upward pressure on commodity prices, complicating growth prospects. However, targeted government cash injections offer some relief.

Several upside catalysts could bolster economic resilience. Benefits from the technology boom, heightened tourism activity, and accelerated investment execution might propel economic expansion. Strategic initiatives in national development blueprints and increased realisation of approved investment inflows provide supplementary momentum. Malaysia anticipates 27.3m tourist visits in the fiscal year, driven by government incentives such as charter flight subsidies and visa liberalisation. Since reopening borders in April 2022, the tourism industry has seen a promising recovery, with tourist arrivals rising by 27.5% YoY to 7.6m in 4MCY24, contributing RM22.2bn in 1Q24, a 66% YoY increase.

The return of international tourists should drive economic growth, benefiting the retail and hospitality sectors. Based on Tourism Malaysia data, tourist expenditure per capita of RM3,540 is now above pre-pandemic levels. This will boost sales for Spritzer and InNature, with tourist spending contributing c.15% of InNature’s sales pre-pandemic. All in all, while risks persist, the growth outlook tilts favourably upwards, underpinned by these pivotal factors supporting economic vitality.

Wildcards on Petrol Subsidy Rationalisation

Following recent diesel subsidy adjustments, we anticipate that the Malaysian government will reform the RON95 petrol subsidy, targeting the exclusion of higherincome households and non-residents. The timing and specifics of this recalibration are crucial, likely resulting in an increase in RON95 petrol prices from the current subsidised rate. To cushion the impact on lower-income groups, targeted cash transfers are anticipated, utilising data from the Central Database Hub (PADU).

This adjustment aligns with Budget 2024's fiscal consolidation objectives aimed at significantly reducing subsidy expenditures. Savings from recalibrated subsidies across various sectors will contribute to these fiscal goals. A phased price increase could provide substantial savings over the next year, with a modest rise by mid-2024 aligning with budgetary targets. If delayed until later in the year, a more significant increase might be necessary.

Nonetheless, we believe that delaying the RON95 subsidy reforms until late 2024 remains an option, with more details likely to emerge during the Budget 2025 presentation. A gradual approach to subsidy reform is crucial to avoid sudden inflationary shocks. This strategy aims to balance fiscal responsibility with inflation control, targeting our in-house forecast for an annual inflation rate around 3% for this year.

The impact of adjustments in the RON95 petrol subsidy on inflation will be more pronounced due to its larger consumer base, encompassing a significant group of private users. Petrol holds a weightage of 5.5% in the CPI basket compared to diesel's 0.2%, necessitating a deliberate and gradual approach to prevent a sudden spike in inflation. The wider implications of the RON95 subsidy cut on household purchasing power are substantial compared to diesel, requiring careful management to maintain economic stability. Despite these considerations, the timing of the subsidy rationalisation remains status quo, reflecting the government's cautious stance in balancing fiscal responsibility with inflation control.

Inflation Outlook and Price Trends

Looking into 2H24, inflation is projected to chart a stable course, influenced by resilient demand dynamics and subdued cost pressures. Both headline and core inflation averaged 1.8% YoY in the first five months of 2024. For the full year, BNM projects headline and core inflation to average within the 2.0%-3.5% and 2.0%-3.0% ranges, respectively.

The fuel price for diesel has remained at RM3.35 per litre since the diesel subsidy rationalisation programme commenced on 10 June. Given diesel's weight of just 0.2% in the overall headline CPI, the potential for significant inflationary effects is minimal. A straightforward calculation indicates that a 1% increase in diesel prices would result in a mere 0.002% rise in the overall inflation rate. Consequently, floating the diesel price from RM2.15 to RM3.35, representing a 55.8% increase, would contribute approximately 0.112% to the overall inflation rate.

The potential introduction of targeted subsidies for RON95 in 2H24 remains uncertain. Concurrently, a one-off substantial increase in civil servant salaries by over 13%, totalling approximately RM10bn, could challenge fiscal targets and exacerbate inflationary pressures by raising private sector wage expectations. Additionally, the rollout of EPF Account 3 aims to support consumer spending, countering sluggish global growth and rising living costs post-subsidy rationalisation, though it may induce demand-pull inflationary pressures. Recent data suggests only 27.8% of the 13.01mn EPF members under 55 have withdrawn RM7.81bn from the Flexible Account, indicating withdrawals might be less than the expected RM20bn annually.

We maintain our in-house headline inflation projection at 3% YoY, with risks skewed towards the lower end of the official 2.0%-3.5% range, contingent on the timing of RON95 subsidy rationalisation. A gradual approach to subsidy reform is crucial to prevent abrupt inflationary shocks. The inflationary trajectory will hinge on key catalysts such as the lagged impact of consumption tax measures, RON95 subsidy rationalisation timing and quantum, potential demand upsides from partial pension fund withdrawals, and spillover impacts from higher global commodity and food prices. The announced “one-off” increase in civil servant salaries in December 2024, if materialised, may also instil further demand-pull inflationary pressure, with most inflationary impacts becoming more evident in 2025 before normalising in 2026.

Inflation impact on Malaysia household expenditure

According to data from BNM, Malaysia’s household debt rose at a faster pace to RM1.53trn in 2H2023 from RM1.48trn in 1H2023, translating to a household debt-toGDP ratio of 84.2%. The elevated household debt was mainly driven by rising house prices, with home financing comprising 60.5% of total household debt. Despite the rising household debt, household spending on both necessities and discretionary items continued to expand, supporting private consumption to grow by 4.4% in 2H2023.

Malaysian household expenditure is generally focused on housing, utilities, gas and other fuels (23.2%), food & non-alcoholic beverages (16.3%), restaurants and hotels (16.1%), and transportation (11.3%). According to the Department of Statistics Malaysia (DOSM), Malaysia’s household average monthly expenditure rose by a 3-year CAGR of 3.7% to RM5,150 in 2022 from RM4,608 in 2019, driven by increased spending on housing, utilities, food, and transportation. However, mean household income grew at a slower pace, a 3-year CAGR of 2.5% to RM8.5k in 2022 from RM7.9k in 2019, fuelling concerns about rising cost of living pressures. Additionally, higher SST, potential implementation of a luxury tax, and subsidy rationalisation could further strain Malaysian household budgets.

Assessing Currency Impact on Consumer Companies

A neutral tone in the latest MPS and ongoing risks strengthen our view that the OPR will remain at 3.00% for the rest of 2024. BNM’s consistent forward guidance since September 2023 indicates comfort with the current monetary settings, suggesting no immediate need for policy adjustments. Government initiatives are anticipated to support the MYR towards the year-end. We forecast the MYR to range within 4.55-4.65 by year-end, considering the US Fed’s widely anticipated rate cut cycle commencing in September, despite a slower pace of US Federal Funds Rate (FFR) cuts than initially expected earlier this year. The Renminbi’s resurgence and BNM’s steadfast maintenance of the OPR are expected to reinforce the MYR’s stability. This forecast hinges on sustained improvements in Malaysia’s fiscal and current account balances, alongside the normalisation of US FFR movements by the close of 2024.

The domestic macroeconomic environment, particularly the transparent approach to fuel subsidy rationalisation, is anticipated to provide additional support for the MYR. Robust economic indicators and inflation trends in the US could delay FFR reductions, bolstering the USD and potentially exerting downward pressure on the MYR. Despite these external pressures, our forecast remains aligned with the range, reflecting a balanced assessment of domestic policy support and global economic dynamics.

Prolonged MYR weakness has translated into imported inflation as Malaysia imports around 60% of its food, affecting consumer disposable income. Additionally, most of the consumer companies are exposed to USD on export sales and import of raw materials. Nevertheless, we believe that the impact on fluctuations in the USD are minimal on the consumer companies under our coverage, as stronger export sales due to weaker MYR will be offset by higher import costs.

Based on our estimates, for every 5% appreciation in the USD, we estimate that earnings impact on consumer companies under our coverage is less than 5% (see Table 1). However, Spritzer’s earnings is negatively correlated with USD appreciation as its main raw material, PET resin is denominated in USD, while a significant portion of its revenue is derived locally. As such, its earnings are estimated to fall by 7-9% for every 5% increase in USD.

Commodity Prices a Mixed Bag

Stabilization in commodity prices. Although there has been a slight rebound in wheat prices recently due to unfavourable weather conditions in wheat producing countries, it is still significantly lower (-c.60%) than its peak back in 2022. Cocoa and coffee prices have spiked by 86% and 23% YTD respectively, dragged by disappointing harvest in key producing countries. On a brighter note, major commodity (corn, soybean, sugar) prices have declined by c.8-17% YTD, due to bumper harvests in key producing countries.

We anticipate the prices to remain at current levels in 2HCY24, given the ample supply and subdued global demand. As such, we believe that it will likely translate to an uptick in profit margins for F&B manufacturers such as CCK (corn and soybean meal), Kawan Food (wheat) and Able Global (milk and sugar). As for QL, while the lower feed cost should benefit its farming operations, we believe that the impact on margins will be muted as the lower commodity price would result in a compressed margin for its trading of feed raw material segment.

Impact of egg subsidy removal. While the government has yet to announce when the egg subsidy will be removed, we believe that the impact on the likely removal of subsidy towards poultry players will be minimal. Recall that the Grade A eggs are being sold at a ceiling price of RM0.42 each, Grade B at RM0.40 and Grade C at RM0.38. The government will provide a subsidy of RM0.10 per egg. While we foresee a shortterm negative impact on poultry players profit margins should the subsidy be removed, we believe this will be beneficiary to the sector in the long run. The absence of intervention in the form of subsidy would create a real demand for chicken and egg that would eventually drive the market to reach an equilibrium price in addition to the stabilization in global commodity prices (soybean and corn). It is estimated that Malaysians consumes 50kg of chicken meat per capita/year and approximately 17kg of eggs per capita per year, as compared to the global average of approximately 17kg of chicken meat per capita per year and 10kg eggs per capita per year.

China’s Impact on Malaysia’s Economy

China's economic outlook faces significant risks, including a prolonged property sector downturn, regulatory uncertainties, and weak private investment, despite 1Q24 policy stimulus. While the property market's drag may lessen, full recovery remains uncertain without substantial policy interventions.

Exports are expected to drive growth, though trade tensions with the US and EU present substantial risks. The White House's announcement of tariff hikes on US$18bn of Chinese imports, effective August, and potential future tariffs, coupled with EU restrictions, should exacerbate these challenges. We project China's export growth at 7.0% YoY for 2024, supported by robust tech demand and easing global financial conditions.

Domestic consumption and investment growth are likely to remain weak, despite strong external demand. We anticipate a growth rate of ~4%, although revisions in GDP measurement methodologies pose downside risks. China's pivot to completing pre-sold homes is crucial for restoring buyer confidence but this will require time and significant policy support.

Malaysia's high trade reliance makes it vulnerable to global economic fluctuations, particularly in electronics. A downturn in major economies like the US, China, and the EU could impact ASEAN trade, though an upturn in electronics exports may partially offset this. We project Malaysia's exports to rebound to +5.4% YoY in 2024.

China's slowdown significantly impacts Malaysia through trade, investment, tourism, and financial channels as China is Malaysia’s largest trading partner. A 1% decline in China’s GDP growth could reduce Malaysia’s growth by ~0.5 percentage points. China's share in Malaysia's total trade is 17%, with exports at 13.5% and imports at 21.3%. Diminished Chinese tourist arrivals and investment flows further threaten Malaysia's growth momentum in 2024.

Rise of Athleisure in Fashion and Retail

Welcoming casualization of fashion. With the rise of health and wellness among consumers, it is no surprise that consumer spending on sportswear have been on an uptrend in the recent years. Meanwhile, as celebrities and social media platforms have been promoting athleisure, it has successfully transformed activewear into a new fashion statement, given its modern aesthetics and functionality. The increase in casual dress codes in workplace and social settings has helped to fuel the demand for athleisure apparel. This has managed to capture the attention of consumers, especially among the experience-loving Millennials and Gen Z.

According to data from Statista, global athleisure market is estimated to reach USD319.4bn in 2028, representing a CAGR of 5.9% from 2023. Based on the product breakdown, we estimate the apparels segment to account for c.25% of the athleisure market with a revenue of USD85bn in 2023. While consumers may be moving away from high-priced items like electronics and vehicles, we believe that consumers are still willing to spend on little luxuries like sportswear apparels. Furthermore, the growing awareness and wardrobe casualization will bode well for Magni, as it should translate to stronger orders from its major client, one of the largest players in the athleisure market globally.

New generation of consumers

Change in consumer spending pattern. Having coming of age in an era with rapid technological change, access to education, experiencing two major economic uncertainties growing up (The Great Recession and The Covid-19 pandemic), Millennials (born between 1980 and 1997) and Gen Z (born between 1998 and 2012) typically have a different approach and preference to consumption when compared to Baby Boomers and Gen X. According to Gfk, Millennials are now the world’s biggest generation, accounting for 29% of the world’s population with a total income of USD15trn in 2023. Meanwhile, Gen Z’s economic power is growing at the fastest rate and in 2020, it is estimated to jump by 400% to USD33trn over the next decade.  

Omni-channel to be the new norm. Omni-channel experience by offering both online and in-person shopping experience is fast becoming the new norm for the digital natives of the younger generation. Given the vast amount of time the young consumers spend online, this group of consumers generally spend time and consideration researching before making their purchases, making them a group of picky but practical consumers. While brand loyalty is strong, the loyalty may waiver should the brand is lagging behind times or an unpleasant experience occurs.

Unlike the previous generations before them, Millennials and Gen Z prefers experience over product ownership and are also more willing to spend to cope with stress, despite facing economic headwinds. This is because splurging on “little luxuries” that will provide instant gratification, as traditional milestones (ie homeownership or saving for retirement) feels far-fetched. With Gen Z and Milennials beginning to wield more economic power, we believe that it is crucial for businesses to understand and adapt to the spending patterns, as the two cohorts’ behaviours will likely shift the retail landscape.

Valuation and Recommendations

Maintain Overweight call on sector

All in all, we remain our Overweight call on the consumer sector as we expect domestic demand to be supported by private consumption, given the stable job market, recovery in the tourism industry as well as better consumer disposable income. We believe that this will benefit the consumer staple players with better earnings visibility as consumer spending on essential goods will likely be prioritised. Our preferred pick for the sector is Able Global and Magni-tech. We reiterate our Outperform call on Able Global (TP: RM2.30) and Magni-tech (TP: RM3.26) on better earnings prospects due to higher margin as well as robust demand for F&B products and sportswear.

Able Global (Outperform, TP: RM2.30): We continue to favour Able Global, as we expect stronger contribution from its Mexico JV. This is mainly driven by the resilient demand for dairy products and higher exports as we understand that Able Global is looking to expand its geographical footprint to countries like Haiti, Puerto Rico. In addition, we believe that its current valuation remains attractive, trading at 10x forward PE, representing a 40% discount to our consumer sector average forward PE of 14x.

Magni (Outperform, TP: RM3.26): We are still positive on Magni’s future outlook as we foresee robust sportswear sales, given the rise of athleisure as a new fashion statement and the increase in awareness towards sports and health. Furthermore, we view Magni’s current share price as attractive, trading at a forward PER of 8x, representing a c.40% discount to our consumer sector average forward PER of 14x.

DKSH (Outperform, TP: RM5.85): We foresee that DKSH is well-positioned to cushion itself from down-trading activities that would occur among price sensitive consumers given its well-diversified portfolio. In addition, higher consumer disposable income should also augur well for DKSH. We maintain our Outperform call and TP of RM5.85 based on a 7x PER pegged to FY25F EPS. We believe that the current valuation is undemanding, trading at 6x, which is below its average 1-year forward PER of 7x.

Kawan Food (Outperform, TP: RM2.40): We remain positive on Kawan’s future prospects, mainly driven by robust demand for frozen food products and recovery in export sales while being supported by new product launches. Better cost control measures (SKU rationalisation) and lower raw material cost should lead to an expansion in profit margins. We opine that the stock is currently trading at an undemanding valuation of -1SD of its 1-year forward PE.

QL (Neutral, TP: RM6.85): We foresee slower earnings growth for QL in FY25F, coming off a high base in FY24 and a normalisation in earnings from the Marine Product Manufacturing (MPM) and Integrated Livestock Farming (ILF) segment. We reiterate our Neutral call and TP for QL, as we believe that the positives from its business operations have been priced-in given the recent run in its share price.

Spritzer (Neutral, TP: RM2.50): We continue to expect sustained bottled water demand, mainly attributable by the recovery in tourism activities, HORECA (hotel, restaurant and café) channels as well as the hot weather. The normalisation of PET resin prices could translate to better profit margins for Spritzer, given the better economies of scale thanks to stronger bottled water demand. However, we believe that the positives have already been factored in the recent run-in share price. As such, we maintain our Neutral call on Spritzer with a TP of RM2.50 based on 13x FY25F EPS.

InNature (Neutral, TP: RM0.31): Although increase in tourism activities may lift sales, we remain wary on InNature’s future prospects as we believe that the overall retail environment on discretionary products will remain soft. Furthermore, we expect InNature to post weaker sequential earnings, given the absence of festive spending before recovering in 4QCY24.

CCK (Underperform, TP: RM1.20): While CCK’s business operations will remain resilient as its retail segment remains as the main revenue contributor to the group, we are expecting slower earnings growth however, dragged by the capacity constraint from its Indonesia operations as well as normalisation in earnings from its poultry segment following the removal of chicken subsidy. We believe that the positives from higher consumer spending have been priced-in, as the stock is trading at a premium currently, at +1SD of its 1-year forward PE.

Source: PublicInvest Research - 29 Jul 2024