Spending on consumer staples will be sustained

PETALING JAYA: Incentives under Budget 2020 and the recent RM20 billion financial stimulus are expected to remain intact, therefore, sustaining spending on essential goods, said Affin Hwang Capital.

“We do not expect any drastic changes to the cash assistance and broad-based incentives announced under Budget 2020 and the recent RM20 billion financial stimulus package; this should keep consumer spending afloat especially among the lower-income group. As such, we broadly continue to favour the staple producers over the retailers,” the research house said in a report.

The start of 2020 has been turbulent, starting with the outbreak of Covid-19 followed by an unexpected change in the Malaysian government.

In tandem with Affin Hwang’s 2020 gross domestic product growth downgrade to 4.0% (from 4.5%), the research house had lowered its overall sector earnings forecast by 9ppt in the recent results season.

“Post-revision, we project overall sector earnings per share to recover by 4.4% year-on-year (y-o-y) for 2020, subsequent to the 6.5% y-o-y contraction in 2019. We expect 2020 growth to be led mainly by large-cap staples such as Nestle (Malaysia) Bhd and QL Resources Bhd in addition to MSM Malaysia Holdings Bhd turning around to a core profit in 2020.”

Overall, Affin Hwang believes the consumer sector forward price-to-earnings ratio of 29 times (+1 standard deviation above five-year mean) remains rich but sustainable given its resilient earnings delivery and decent dividend yields. As such, it remains neutral on the consumer sector.

Its sector top pick remains QL Resources, given its robust long-term earnings prospects, and the growing Family Mart operation that is likely to contribute more meaningfully to group earnings. Its other buy calls in the consumer space are Ajinomoto (M), Heineken Malaysia and Perak Transit.

The consumer sector aggregate core earnings rose 8.8% y-o-y in Q4’19, largely lifted by better performance from PPB Group and British American Tobacco (M). PPB’s earnings were boosted by higher contribution from grains & agribusiness while BAT saw a higher seasonal volume sales trend over the period. Seven of the 11 companies posted results that were broadly in line with expectations.

On a separate note, Affin Hwang said the previous government had relaxed rules governing foreign retail store operators under the revised Guidelines on Foreign Participation in Distributive Trade Services 2020 that came into effect Jan 1. There are two major revisions:

One: foreign operators are allowed to open “smaller-format” superstores (previously a local partner with at least 30% equity stake is required).

Two: population size requirement of 200,000 for every superstore has been abolished.

It noted that the relaxation of rules would pave the way for existing foreign operators (such as Aeon, Tesco, Dairy Farm International, Lulu) to expand their smaller-store concepts while at the same time attracting new foreign investors into the space.

“That said, the longer-term impli-cation could be a possible rise in competition in the smaller format store space, which may be undesirable to Aeon’s expansion plans of small standalone supermarkets under the MaxValu brand.”

source https://www.thesundaily.my/business/spending-on-consumer-staples-will-be-sustained-CM2097774