• Stable consumer spending in 2024. Companies under our coverage in the consumer sector saw 9MFY24’s earning surge by +27.2% YoY, thanks to the stable demand and the reduced input costs attributed to stabilised commodity prices and increased consumer spending. Similarly, the distributive trade showed an increase of (10M24: +5.6% vs. 10M23: +7%). Despite the slower growth, the fundamental factors remained intact underpin by stable job market (3.2% and lowest since January 2020), low inflationary pressure and higher expected tourism activities. Moreover, retail trade grew by +6.1% YoY as at 9MFY24 (9MFY23: +9%) which indicates subdued yet stable consumer demand. The consumer confidence national index increased +27% YoY indicating confident consumer sentiment. The FBM KL Consumer Index (KLCSU Index underperformed by -12.3% YTD relative to FBMKLCI Index attributed to the magnitude of decline in share price of Nestle, PetDag, and PPB Group which constitutes 23% weightage in the KLCSU Index.

• Optimistic 2025 Outlook. Looking into 2025, a boost in domestic demand is anticipated stemming from the higher disposable income thanks to the i) civil servant wage hike, ii) minimum wage hike, iii) bigger allocation of financial aids such as Sumbangan Tunai Rahmah, iv) EPF Account 3 withdrawals, and v) expected robust tourism activities. Nonetheless, we are cautious on the downside risk caused by the implementation risk from the subsidy rationalization initiative (SRI) of RON95 and the negative impact on companies’ operating costs attributable to the increase in minimum wage and possible employer’s EPF contribution to foreign workers. Nonetheless, our in-house economics team forecast a stable inflation rate of 2.7% despite the floating of RON95 as i) only T15 are required to pay at the floating price, and ii) stable Brent oil price.

• Positive Outlook for F&B in 2025. The F&B segment is expected to benefit from an anticipated increase in disposable income, with consumers diversifying their purchases, such as opting for premium products within the same range. Currently, commodity prices for cocoa, coffee, and milk powders are on an uptrend, while other commodity prices have stabilised from their all-time highs caused by Ukraine-Russia war. Companies under our coverage that could be affected are Nestle, Farm Fresh, and Dutch Lady. On the other hand, our in-house economics team forecasts a strengthening Ringgit, year-end 2025 forecast of RM4.25, we believe this will offset some of the higher commodity prices. Finally, the increase in the sugar tax on sugary drinks, from 50 sen to 90 sen per litre is deemed to have minimal impact, as most companies are operating well below the threshold.

• Cautious on Discretionary Segment. We uphold a positive yet cautious outlook on retail segment attributable to the anticipated boost in consumer spending yet cautious on the potential subdued demand on premium discretionary goods with the possible tightened spending power and substitution effect from the upper tier class resulting from the floating of RON95. Hence, we prefer value-for-money retailers such as MR DIY (BUY, TP: RM2.40), and AEON (BUY, TP: RM1.75) thanks to the stable sales and good costcontainment efforts. Retail Group Malaysia (RGM) reported a +3.8% growth in 3Q24 thanks to the stable unemployment and inflation rate. RGM anticipates 4Q24 retail sales to further expand at +4.4% and full-year forecasts of +3.9% in 2024 and +4% in 2025, balancing both the boost in consumer spending and the subdued sentiment due to SRI. Furthermore, the expanded Sales and Service Tax (SST) list to include imported premium goods, such as avocados and salmon, remains ambiguous. We believe the only company that might be affected is Amway, which primarily sells premium health and wellness products.

• Robust tourism activities. The higher tourist arrivals expected in 2025 with a target of 31.4mn in 2025 by the Ministry of Tourism, Arts, and Culture is anticipated to boost the consumer spending. The number of tourist arrivals as at Oct 2024 have surpassed the 2023 levels (10M24: 20.6mn vs. 2023: 20.13mn). We believe that the tourism activities will continue to be robust in 2025 due to several factors such as Malaysia assuming the chair of ASEAN 2025 and the 10 new international flight routes added. Hence, we foresee companies such as AEON (BUY, TP: RM1.75), QL Resources (HOLD, TP: 4.47), and Spritzer (BUY, TP: RM3.30) to benefit from the higher tourist footprints. Aeon is seen to benefit from the increase in footfall at malls especially their Southern region malls which benefited from the increasing presence of Singaporean tourists. Moreover, higher tourist arrivals would benefit QL Resources especially their CVS segment due to the widespread availability of Family Mart and their vending machines, Family Mart Mini. Lastly, robust tourism activities are an advantage for Spritzer considering mineral water is an essential in Malaysia’s humid and hot weather.

• Maintain OVERWEIGHT on Consumer Sector. We maintain the OVERWEIGHT rating accredited to the anticipated boost in domestic demand thanks to the higher disposable income while we remain cautious on the downside risk caused by the SRI on RON95, negative impact of minimum wage and the proposed EPF contribution to foreign workers. We opine that the boost in domestic consumption outweighs the downside risks due to the magnitude of affected social group affected by SRI. Our top pick for the sector is FFB (BUY, TP: RM2.02), MRDIY (BUY, TP: RM2.40), and AEON (BUY, TP: RM1.75). We like FFB due to its rigorous expansion in SKUs, increasing HORECA sales, and penetration into Philippines market, MRDIY because of its store’s expansion, KKV acquisition, and costcontainment initiative meanwhile AEON for its mall rejuvenations initiative, private brand growth initiative and effective cost management.

• Key downside risks. i) Implementation risk of SRI on RON95, ii) negative impact from higher minimum wage and potential EPF contribution for foreign workers, iii) sudden sharp increase in commodity prices, iv) weak consumer sentiment, and v) weakening Ringgit

Source: BIMB Securities Research - 2 Jan 2025