• 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 stabilise 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 remain 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 but 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% YoY 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 0f 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. However, our in-house economics team forecasts a strengthening Ringgit, year-end 2025 forecast of RM4.25, which is expected to benefit MSM, Farm Fresh, MR DIY, Padini, and QL Resources. Finally, the increase in the sugar tax on sugary drinks, from 50sen to 90sen per litre is deemed to have minimal impact, as most companies are operating well below threshold.

• Cautious on Discretionary Segment. We uphold a positive yet cautious outlook on retail segment attributable to the anticipated boost in consumer spending. However, we are 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 cost-containment 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, remain ambiguous. We believe the only company that might be affected is Amway (HOLD, TP: RM6.80), which primarily sells premium health and wellness products.

• Boost in consumer spending. A boost in consumer spending is anticipated from the upcoming i) civil servant wage hike, ii) minimum wage hike, iii) continued and higher allocation of cash assistance like Sumbangan Tunai Rahmah (STR), iv) EPF Account 3 withdrawals, and v) robust tourism activities.

• Civil servant wage hike. The increased civil servant’s disposable income is anticipated to benefit the topline of both consumer staples and discretionary segments as in the first phase of the new remuneration system called Public Service Remuneration System (SSPA) from Malaysian Remuneration System (MRS) where civil servant who opts to change to the new salary scheme will be able to enjoy in total 15% increment divided by two phases. Firstly, an increment of 8% and 4% effective December 2024 for lower and middle grades and upper management respectively. Then, a further increase of 7% and 3% effective January 2026 for lower and middle grades and upper management respectively. In total, the government anticipates an additional of RM10bn cost. We expect a boost in the topline in the consumer sector as the last civil servant wage hike was back in January 2012 of a 13% increase.

• Minimum wage hike. We expect a surge in the topline in both consumer staples and value-for-money retailers from the increase in minimum wage. We believe value-formoney retailers under our coverage such as MRDIY and AEON will benefit from the higher purchasing power considering their small basket sizes of RM24.90 and RM61.80, respectively. In the previous minimum wage hike from RM1,500 to RM1,700 effective May 2022 showed an increase in revenue both QoQ and YoY in our value-for-money retailers, MRDIY, AEON and Padini (refer chart 1).

• EPF Account 3 withdrawals. Around RM5-7bn anticipated to be withdrawn by contributors in the coming years. To recap, RM11.6bn have been withdrawn since May 2024 until November 2024 by 4mn contributors representing 30.5%. The current remaining savings in Account 3 stands for RM7.4bn and as at June 2024, the average withdrawal per contributor stands at RM2,382. As the withdrawal amount and timing is decided by the contributor, we believe this will marginally increase consumer’s purchasing power, hence, benefit consumer staples and the retail segment.

• Continued and higher allocation of cash assistance. In the recent 2025 budget announcement, the government declared a higher financial aid assistance from RM10bn to RM13bn for Sumbangan Tunai Rahmah expected to benefit 9mn recipients, equivalent to 60% of Malaysia’s adult population. We anticipate this to benefit the consumer staples’ topline.

• Robust tourism activities. The higher tourist arrivals expected in 2025 with a target of 31.4mn in 2025 by 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 assumes 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 such as their Southern region malls which have experienced more footfalls from 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.

• Slight potential downside risks. Some of the potential downside risks in 2025 is the implementation risk of SRI on RON95, minimum wage squeezing margins, and the possible EPF contribution by employers for foreign workers. The floating price of RON95 is theoretically affecting only T15, however, we are cautious on the possible implementation risk and ripple effect of the SRI. Moreover, we foresee premium discretionary items demand to be subdued as a consequence of the floating price. Secondly, there are negative impacts foreseen due to minimum wage hike which will squeeze companies’ margins. The company under our coverage that potentially significantly impacted by the higher operating costs is MRDIY of an estimation of additional cost of RM2mn monthly as 56% of their total workforce are currently earning minimum wage. However, we believe that MRDIY’s cost-containment initiative of installing warehouse automation will offset the increase in salary cost impact. Furthermore, FFB (BUY, TP: RM2.02), and MSM (HOLD, TP: RM1.10), are expected to have a slight impact by the minimum wage hike at RM2.2mn and RM3.5mn additional costs annually where 35% of FFB’s total workforce are earning minimum wage. Thirdly, the possible employer’s EPF contribution for foreign workers may further squeeze margins though not as significant as the minimum wage impact. Spritzer guided that circa 25% of their total workforce are foreigners meanwhile MRDIY’s is 15% and FFB around 10%.

• 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 stores’ expansion, KKV acquisition, and costcontainment initiative meanwhile AEON for its mall rejuvenations, private brand growth initiative and effective cost management.

Source: BIMB Securities Research - 8 Jan 2025