Seeking resiliency amidst high inflation
? We downgrade the consumer sector to Neutral as we expect weakness in
consumer spending and further margin pressure for consumer companies.
? In 2H22F, we believe that consumers are likely to focus their spending on
daily necessities rather than discretionary items.
? In view of this, we prefer staples (QL, FFB, and KFB), while we think MR DIY
as a ‘value retailer’ could be a beneficiary of further consumer downtrading.
Headwinds ahead for Malaysia’s consumer sector
We downgrade Malaysia’s consumer sector to a Neutral from Overweight. We expect the
weak macroeconomic outlook (spike in inflation, interest rate hikes and cuts in subsidies)
to erode consumer spending ability, resulting in slower demand for consumer goods, mainly
discretionary items. In addition to margin compression and rising cost pressures, we expect
consumer names to face a more subdued operating environment.
Weaker sales and margin compression expected
In 2H22F, we expect consumer companies to see margin pressure (2-3% pts) from higher
operating expenses (labour, utilities, etc.), weaker ringgit and higher input costs. While
most consumer companies under our coverage can raise product prices to offset higher
input costs, we think there is limited room as further selling price hikes could come at the
expense of sales volumes. Hence, we expect consumer companies to absorb some of the
higher costs in a bid to support sales volume, resulting in margin compression.
Demand normalisation with consumers prioritising daily necessities
Amid an erosion in spending power, consumers are likely to prioritise spending on daily
necessities, while the demand for discretionary goods should weaken. In 2H22, we expect
consumer spending to normalise from a high base in 1H22. Note that strong sales enjoyed
by consumer names (mainly discretionary ones) were driven by pent-up demand and
‘revenge spending’, following the easing of lockdown measures and festive celebrations
not subject to Covid-19 restrictions (unlike previous two years).
Weaker discretionary spending concerns largely priced-in
While we expect a weaker outlook from 2H22F onwards, we are still projecting an 8.9%
yoy EPS growth in CY22F, attributed to a high base in 1H22F (+11 to +13% yoy). In our
view, the weaker earnings prospects ahead are largely priced in, as the sector (excluding
MR DIY) is trading at 31.4x 1-year forward P/E, a 2.5% discount to its 10-year historical
mean of 32.2x. While the discretionary sub-sector (excluding MR DIY) is trading at 15.2x
1-year forward P/E (below its 10-year mean of 19.7x), the mean P/E is affected by a high
base due to the distortion from the Covid-19 period (weaker earnings and/or losses).
Prefer staples to discretionary; adopt stock-selective approach
Nevertheless, we foresee pockets of opportunity in the sector. In our coverage, we like QL,
Farm Fresh and Kawan Food as we believe the demand for their items is inelastic and will
be boosted by higher in-home food consumption. In the discretionary space, we like Mr DIY
as a key beneficiary of consumer downtrading given its market position as a ‘value retailer’.
We downgrade three discretionary stocks (7-11, Berjaya Food and DKSH) to Hold (Page
25-30) as we expect these companies to be hurt by weak consumer spending.