Consumer spending, private consumption to remain healthy

PETALING JAYA: Private consumption is projected to grow at 6.9% and healthy consumer spending is expected to be sustained due to a steady labour market and stable inflation, despite the low consumer sentiment recorded in the third quarter (3Q’19) by the Malaysian Institute of Economic Research (MIER) according to AmInvestment Bank Research.

The research house noted that year-to-date (y-t-d) commodities prices have been mixed compared with the previous financial year. It pointed out that companies such as Power Root Bhd, Berjaya Food Bhd (BFood), Nestle (Malaysia) Bhd and Leong Hup International Bhd (LHI) under its coverage will be affected by changes in commodities prices.

“However, we anticipate the commodities’ prices to inch up moving forward, leading to a slight downward pressure on the profitability of these companies in 2020,” it said in a report.

With that, AmResearch stated that it is maintaining its “overweight” call on the consumer sector, explaining that anticipated growth for consumer staples will be stable with sustained consumer spending and growing private consumption.

The research house listed companies such as Power Root, LHI, Mynews Holdings Bhd and Nestle will be beneficiaries of the stable growth.

“On the other hand, consumer discretionary will be more susceptible to the weak consumer sentiment and challenged by the increased competition with substitutes becoming more readily available in the market,” it said.

AmResearch said BFood and Padini will be affected by the weaker sentiment, and challenged by the increased competition with substitutes becoming more readily available in the market.

In addition, the research house expects earnings growth for Power Root, Guan Chong, LHI and Padini to be driven by its overseas expan-sion, which offers diversification in their earnings base.

It pointed out that Power Root plans to boost its export sales in China, and the Middle East and North Africa region, while Guan Chong plans to construct a new cocoa bean grinding plant in Ivory Coast.

“LHI plans to expand its operations in Vietnam, the Philippines and Myanmar to tap into the growing markets while diversifying its earnings base,” said AmResearch.

Meanwhile, Padini’s overseas expansion plan will be in its Cambodia’s operations al-though at a much less aggressive pace.

The research house cautioned that it may downgrade the sector to neutral, if there is a sharp weakening of the ringgit against the dollar, from the RM4.12 assumption average in 2020.

“In addition, a sluggish recovery in economic fundamentals which could result in high operational costs and a weak ringgit may dampen the recovery in consumer sentiment,” said AmResearch.

It also said a sharp decline in global economic conditions could negatively impact the overseas ventures of companies under its coverage.

The research house’s top picks for the sector are Power Root and Guan Chong.

source https://www.thesundaily.my/business/consumer-spending-private-consumption-to-remain-healthy-AM1806406