Consumer Staples - overall - Slower growth, speedy recovery
Recommendation : Neutral
Consumer and business sentiment weakened in 4Q14 due to higher living costs and a weaker RM and oil price. But the impact should be minimal and short-lived as Malaysians adapt to the higher living costs. Lower raw material prices should offset the impact of a stronger US$. We remain Neutral on the consumer sector, maintaining an Overweight on F&B and Underweight on tobacco while upgrading breweries to Neutral given the higher dividend yield. We also upgrade 7-Eleven from hold to Add following its recent selloff. Switch to F&B plays for their earnings resilience and long-term growth potential from a growing population. QL remains our top pick.
We remain Neutral on the consumer sector, maintaining an Overweight on F&B and Underweight on tobacco while upgrading breweries to Neutral given the higher dividend yield. We also upgrade 7-Eleven from hold to Add following its recent selloff. Switch to F&B plays for their earnings resilience and long-term growth potential from a growing population. QL remains our top pick.
2014 sentiment weakened
The government continued to cut subsidies in 1H14. This, coupled with the upcoming GST implementation, RM’s weakening against the US$ and a fall in crude oil prices dented consumer and business sentiment. The consumer sentiment index fell 15pts qoq to 83 while the business conditions index slipped 9.5 pts qoq to 86.4 in 4Q14. The weaker sentiment dented sales volume for the brewery and tobacco companies but F&B companies generally continued to perform well. In tandem with this, the F&B companies’ share prices generally outperformed the KLCI and brewery sector. Though BAT’s sales volume was impacted, its share price outperformed KLCI as its earnings continued to grow due to higher selling prices.
Expect spending to slow
In view of the weaker consumer sentiment in 4Q14, we expect consumer spending in 2015 to be even slower. We scale back our 2015 growth forecast for consumer spending from 5.5% to 4% (6.5% estimated for 2014). The research firm Retail Group Malaysia has also revised down its retail sales growth estimate for 2015 from 6% to 5.5%.
But impact to be short-lived
Although we expect spending to be even slower, we still expect buying activities to pick up before the implementation of GST on 1 April 2015. Consumption should return to normal levels some three months after GST implementation, thanks to steady income growth and a stable employment rate. Although consumer and business sentiment has weakened, it is still better than sentiment during the last economic crisis when retail sales still increased by 0.8% yoy and unemployment rate remained low at 4%. Furthermore, the BR1M assistance to poorer households (household income
No substantial impact from stronger US$
We do not expect the stronger US$ to leave a substantial dent in companies’ earnings considering that raw material prices have also declined. For tobacco and beer companies, the impact of the stronger US$ could be even smaller as taxes make up the majority of COGS. Also, all the companies have some revenue exposure in US$ which serves as a natural hedge and the declining crude oil prices should lead to lower operating costs, which will help to support margins.
Source: CIMB Daybreak - 10 February 2015
Recommendation : Neutral
Consumer and business sentiment weakened in 4Q14 due to higher living costs and a weaker RM and oil price. But the impact should be minimal and short-lived as Malaysians adapt to the higher living costs. Lower raw material prices should offset the impact of a stronger US$. We remain Neutral on the consumer sector, maintaining an Overweight on F&B and Underweight on tobacco while upgrading breweries to Neutral given the higher dividend yield. We also upgrade 7-Eleven from hold to Add following its recent selloff. Switch to F&B plays for their earnings resilience and long-term growth potential from a growing population. QL remains our top pick.
We remain Neutral on the consumer sector, maintaining an Overweight on F&B and Underweight on tobacco while upgrading breweries to Neutral given the higher dividend yield. We also upgrade 7-Eleven from hold to Add following its recent selloff. Switch to F&B plays for their earnings resilience and long-term growth potential from a growing population. QL remains our top pick.
2014 sentiment weakened
The government continued to cut subsidies in 1H14. This, coupled with the upcoming GST implementation, RM’s weakening against the US$ and a fall in crude oil prices dented consumer and business sentiment. The consumer sentiment index fell 15pts qoq to 83 while the business conditions index slipped 9.5 pts qoq to 86.4 in 4Q14. The weaker sentiment dented sales volume for the brewery and tobacco companies but F&B companies generally continued to perform well. In tandem with this, the F&B companies’ share prices generally outperformed the KLCI and brewery sector. Though BAT’s sales volume was impacted, its share price outperformed KLCI as its earnings continued to grow due to higher selling prices.
Expect spending to slow
In view of the weaker consumer sentiment in 4Q14, we expect consumer spending in 2015 to be even slower. We scale back our 2015 growth forecast for consumer spending from 5.5% to 4% (6.5% estimated for 2014). The research firm Retail Group Malaysia has also revised down its retail sales growth estimate for 2015 from 6% to 5.5%.
But impact to be short-lived
Although we expect spending to be even slower, we still expect buying activities to pick up before the implementation of GST on 1 April 2015. Consumption should return to normal levels some three months after GST implementation, thanks to steady income growth and a stable employment rate. Although consumer and business sentiment has weakened, it is still better than sentiment during the last economic crisis when retail sales still increased by 0.8% yoy and unemployment rate remained low at 4%. Furthermore, the BR1M assistance to poorer households (household income
No substantial impact from stronger US$
We do not expect the stronger US$ to leave a substantial dent in companies’ earnings considering that raw material prices have also declined. For tobacco and beer companies, the impact of the stronger US$ could be even smaller as taxes make up the majority of COGS. Also, all the companies have some revenue exposure in US$ which serves as a natural hedge and the declining crude oil prices should lead to lower operating costs, which will help to support margins.
Source: CIMB Daybreak - 10 February 2015
