Consumer sector
Maintain overweight: We have maintained “overweight” on the consumer sector as we expect consumer sentiment to remain healthy. The recent consumer-friendly initiatives, such as the reintroduction of the petrol subsidy, capping of the electricity tariff and introduction of the public transport subsidy, have contained the problem of the rising cost of living and effectively put more money back into the pockets of consumers. The substitution of the goods and services tax (GST) with the sales and services tax (SST) is a net positive for consumers as the SST has a narrower scope compared with the GST.

 
The improved consumer sentiment is manifested in the uptick in the Consumer Sentiment Index as measured by the Malaysian Institute of Economic Research, where the index has recovered beyond the 100-point confidence threshold after three years of a low sentiment trend. We believe the positive trend in consumer sentiment will be sustained as consumers become more confident of the government with expectations of a more people-centric government policies, better governance and transparency. We project private consumption to grow at 6.5% year-on-year on the back of a healthy labour market as well as stable inflation.

The food and beverage sub-sector does not typically benefit from greater disposable income. Given the unique properties and circumstances of the companies under our coverage, we have identified Berjaya Food Bhd, Mynews Holdings Bhd and Power Root Bhd as the top picks for the sector. The downside risks which may prompt us to review our call for the sector include weakening of the ringgit against the US dollar (the 2019 house assumption average: RM4.12). Berjaya Food and Padini Holdings Bhd are beneficiaries of a stronger ringgit. Half of Berjaya Food’s raw material are purchased in US dollars, while 70% of Padini’s raw materials are sourced from China. The second downside risk is sluggish improvement in economic fundamentals, leading to a derating of the sector. A sluggish recovery in economic fundamentals may not see consumers fully benefiting from savings tied to the reintroduction of the SST and consumer-friendly measures, thereby dampening the recovery in consumer sentiment. Our top pick for the sector is Berjaya Food (buy; fair value [FV]: RM2.01 a share): We believe Berjaya Food is a beneficiary as improved consumer sentiment drive discretionary spending.

We believe Mynews (buy; FV: RM1.66) will be an indirect beneficiary of the public transportation subsidy as it boosts foot traffic surrounding the train stations (Mynews operates more than 30 stores at the mass rapid transit, light rail transit and monorail stations).

As a staple product producer, Power Root (buy; FV: RM1.65) will be a potential beneficiary of improved consumer spending. The company is undervalued, trading at 12 times price-earnings ratio (PER) compared with OldTown Bhd which previously traded at an average of 15 times forward PER. Power Root will also benefit from a stronger US dollar as around 50% of its sales are in exports. Our projection for the US dollar/ringgit is at an average of 4.12 for calendar year 2019. — AmInvestment Bank, Jan 7