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Will value emerge in consumer stocks?

TheEdge Wed, Jun 06, 2018 05:00pm - 1 year ago


JUDGING from the rise in the Bursa Malaysia Consumer Product Index in the past two weeks, investors have turned their attention to consumer product stocks. This is despite uncertainties over new policies in the aftermath of Pakatan Harapan’s takeover of Putrajaya.

As at last Thursday, the index had gained 14.81% year to date unlike the benchmark FBM KLCI, which had retreated to where it had begun the year, due to heavy selling last week.

Many agree consumer sentiment is positive, thanks to Pakatan Harapan’s move to cancel the Goods and Services Tax (GST) and stabilise petrol prices.

In the short term, corporate earnings may also be boosted.

“We could see improving consumer sentiment and herd purchases in selected sub-sectors after GST is zero-rated and before SST (Sales and Services Tax) is reintroduced. This will likely boost short-term earnings. In the longer term, the sustainability of earnings will depend on prolonged consumer spending, which, in turn, relies on the people’s real purchasing power,” says Tock Chin Hui, Manulife Asset Management Services Bhd’s head of total solutions and equity investments.

Since GST was implemented in April 2015, it has often been blamed for the rising cost of living. The implementation had come at an unfortunate time — when the ringgit was suffering from a long period of weakness, compounding the woes.

MIDF Research analyst Nabil Zainoodin highlights that local retail sales were subdued by GST with annual sales growing less than 2%. At the same time, it became costlier to import materials because of the weak local currency.

While the Malaysian Institute of Economic Research’s Consumer Sentiment Index has been inching up, it has yet to recover to above its threshold level of confidence of 100 points, last achieved in the third quarter of 2014.

According to an analyst with a local research house, the outlook for consumer products is at its most positive now.

“However, it is not a genuine recovery but simply a recovery off a low base. A genuine recovery entails stronger wage growth, a lower household debt-to-GDP ratio and better affordability. Hopefully, such a deeply entrenched structural recovery is achieved with the new government’s reforms over the longer term,” he opines.

Note that the out-performance of the Consumer Product Index is largely attributed to the confidence of investors in big-cap consumer companies post-election. “For instance, Nestlé Malaysia Bhd and Fraser & Neave Holdings Bhd (weightage of 21.6% and 8.5% respectively on the index) both recorded a YTD return of 44% and 39.1% respectively. Due to the recent rally in share prices, their PER now stands at 46.4 times and 30.9 times respectively while dividend yield has dropped below 2%,” says Nabil.

“At current trading prices, the stocks are overvalued in comparison to the current consumer staples industry’s PER of about 30 times.”

It is worth mentioning that the current valuations for big-cap food and beverage counters were last seen in 2013, which is considered the most robust year for consumer spending in recent times.

Tock opines that the share price rally in some of the large-cap consumer stocks was fuelled by other factors, such as thin trading liquidity and index inclusion in addition to expectation that their earnings would be more resilient and defensive in nature.

However, she believes earnings will have to gain momentum substantially for the stocks to hold up.

The average PER of the index now stands at 28.21 times, higher than its 5-year average of 23.59 times. While the valuations of consumer stocks may seem lofty at current levels, there may still be laggards in the sector.

“On a relative basis, we still see value in selected consumer names,” Tock says, but prefers not to name them.

An analyst who declined to be named says he sees valuation and earnings laggards, especially in the mid to small-cap space.

“These companies are at the tail-end of exhausting their costly inventories. The prices of dairy, coffee and sugar are almost 20% cheaper now than in 2017, which should favourably impact margins heading into 2Q2018. I expect interest to gradually return, leading up to next quarter’s earnings cycle,” he says.

Among the constituents of the index, a handful are still trading below a PER of 15 times.

The cheapest of the lot is MWE Holdings Bhd with a PER of 2.9 times on earnings per share of 57.7 sen. The company, which manufactures for brands such as Nike, Lacoste, Oshkosh, Carter’s and Under Amour, is principally involved in textiles, which contribute 72% to group revenue.

MWE’s largest shareholder with a 32.62% stake is the low-profile tycoon Tan Sri Surin Upatkoon. He is also the largest shareholder of gaming company Magnum Bhd.

Of the top 30 cheapest stocks on the index, slightly over half are debt-free. Formosa Prosonic Industries Bhd, for example, had the largest cash pile of RM194.29 million as at Dec 31, 2017, or 60 sen per share. It is trading at a PER of 9.2 times, partly because its share price has declined 15% year to date.

Interestingly, several furniture stocks have made it to the top 30 cheapest stocks on the Consumer Product Index but this is likely due to an erosion in their share price over the past year.

Lii Hen Industries Bhd has fallen the least (16%) while Signature International Bhd has shed half its share price.

 








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