• Top Picks: Mr DIY Group, Guan Chong, Focus Point, Heineken Malaysia, Mynews, and Leong Hup International (LHIB). Sector sentiment should remain muted until more certainty on the impact of subsidy rationalisation can be gauged. There is also talk of a potential reintroduction of the Goods and Services Tax (GST), which could have material effects on consumer sentiment and lead to more uncertainties. That said, we believe consumer spending, albeit unexciting, will be supported by a stable employment market and continuous government assistance, ie cash handouts and subsidies.

• 2Q24 sector results were within expectations. Notwithstanding the QoQ earnings swings in 2Q24 due to the timing of Aidil Fitri, the sector’s 1H24 numbers reflected resilient consumer spending. All companies under our coverage reported positive topline growth, except for Nestle Malaysia and Power Root. During the quarter, several food manufacturers saw more GPM expansion as their input costs eased. These tailwinds should extend into the upcoming quarters, further aided by a stronger MYR. On the other hand, consumer discretionary players continued to grapple with subdued consumer sentiment as inflation-weary consumers remained thrifty and selective in their spending. Meanwhile, we gathered that the flexible withdrawal of funds following the restructuring of Employees Provident Fund or EPF accounts has not significantly boosted the sales of the companies under our coverage.

• Budget 2025 preview. It should be a consumer-friendly budget, entailing measures such as cash handouts, bonuses for civil servants and income tax relief to help bolster consumption. Meanwhile, we look forward to more details on the implementation of the petrol subsidy rationalisation, and seeing whether the Government is planning to reintroduce the GST. With the last increases taking place in 2014 and 2016, the possibility of excise duty hikes on cigarettes and beer cannot be ruled out. Meanwhile, Health Minister Datuk Seri Dr Dzulkefly Ahmad recently revealed more plans to reduce sugar consumption – this could mean a rate hike for the existing products that are subjected to the sugar tax, and widening of scope to cover more products. The former should affect Power Root, whilst FFB and Nestle could be impacted should the scope widen to dairy-based beverages or ice cream.

• Generally, the strengthening of MYR is positive for the sector, ie boosting consumer sentiment and translating to lower input costs for most of the food manufacturers. We highlight LHIB, Farm Fresh, Mr DIY Group, and Nestle Malaysia as the biggest beneficiaries of the stronger MYR, based on our assessment (Figure 1), while Power Root would stand to lose from this, given its material exposure to the export market.

• Downside risks to our sector weighting: Drastic subsidy rationalisation and a sharp rise in commodity prices. The opposite would constitute upside risks.

Source: RHB Securities Research - 26 Sept 2024