Opportunity in consumer stocks in the new normal

TheEdge Mon, May 18, 2020 02:00pm - 9 months ago

IN general, the consumer sector has always been viewed as a defensive play during a market downturn, but the scenario could be different this time as people adapt to the new normal of living with the risk of being infected with Covid-19.

Analysts say while the consumer sector is still a defensive play, things may not pick up as expected.


Cautious spending

Inter-Pacific Securities Sdn Bhd head of research Victor Wan notes that consumers are very cautious and this mood will persist for three to six months.

In particular, fears over unemployment and job losses may worsen the situation.

"Discretionary spending will be a bit more subdued. People are still worried about job prospects and spending," Wan tells The Edge. "The retail ones - like Padini Holdings Bhd and Bonia Corp Bhd - will be a bit slow, and they will take a longer time to recover.

"However, it's not one-size-fits-all; it will be selective. We really have to adapt to a new normal."

Owing to social distancing requirements, Wan believes F&B operators may see lacklustre performance.

For the brewery segment, he expects minimal impact from the promotional programmes undertaken by the players.

"That might help a bit, but even with that, people may not spend so much because of a lack of funds. The brewery players will take time to recover," he explains.

This comes as the Malaysian Institute of Economic Research's (MIER) consumer sentiment index (CSI) saw a plunge of 31.2 points to a 32-year low of 51.1 in 1Q2020, as households worry about the near-term outlook.

This is the sharpest quarter-on-quarter drop since 2Q2008, during the global financial crisis.

PublicInvest Research in a recent note says the CSI took exactly a year to climb back above the neutral level, with 105.8 points recorded in 2Q2009. "This could repeat during the Covid-19 crisis, albeit slightly longer, consistent with the economy that may reach its optimal level in 4Q, following a challenging period projected for 2Q and 3Q. What is disturbing is that the 1Q2020 CSI level of 51.1 is markedly lower than the 2008 low of 70.5 (2Q2008), suggesting a longer recovery period this time around."

MIER's survey also shows that household finances were at their weakest since 1988 amid the Movement Control Order, which has affected the B40 and M40 groups the most.

Meanwhile, Retail Group Malaysia revised downwards the full-year retail sales growth forecast to -5.5% in 2020 from 4.6% projected in December 2019 on the back of Covid-19 and the MCO.


New ways to shop

When the MCO is eventually lifted, Wan says, the change in shopping patterns will be more obvious, as social distancing will still be strictly enforced post-MCO.

“Online shopping will be popular, owing partly to the low-risk factor, as you don’t have to expose yourself to malls. But, again, [the] drawback is that you are not able to feel and touch the things you are buying.”

Perhaps, businesses have to rework their operating model to regain their sales, according to Areca Capital Sdn Bhd CEO Danny Wong.

“If you can find your way, things could be much better [for you than for your competitors]. I project the new norm will [effect] a drastic change on this sector,” Wong says.

"Online and e-commerce have become a more popular mode of purchase. Similarly, digital payment has become a more popular mode of settlement.”

In a recent research note, CGS-CIMB Research says there has been a rise in e-commerce activity in Malaysia as more consumers turn to online shopping to procure their household food necessities.

“This will benefit mainly large-scale consumer staple companies (Nestlé [Malaysia] Bhd and Fraser & Neave Holdings Bhd) with established brands that are well-integrated into a number of major e-commerce platforms (such as Lazada and Shopee). Other F&B companies, such as Kawan Food Bhd, are also offering customers the option to purchase products on their websites, and have also ramped up online promotions during the MCO.”

Wan also foresees a substitution of brands. “Instead of using established brands such as Dutch Lady and Nestlé, you might change to Aeon brand, which is owned by the retailer itself.”

Rakuten Trade head of research Kenny Yee believes, however, that consumers will not simply switch their brand choices.

“For everyday consumer staples, I don’t think you can change to other brands just to save a little. I think the demand will still be there. If you go for Milo, you won’t go for other substitutes,” he says.


Valuation matters

Wan says the consumer sector is still a good choice for investment compared with other sectors such as aviation and hospitality.

“Despite not being cheap, the impact on their performance is not that significant,” he says.

“For example, QL Resources Bhd’s share price has more or less recovered to its pre-MCO level. It is a testament to the strength of the company and confidence in the sector. Regardless, you still have to eat.”

QL Resources’ year-to-date (YTD) share price has seen a marginal decline of 1%, but its rival Lay Hong Bhd has fallen 16.5%.

Wan says the outlook for poultry players is better because of continuous demand for chicken and eggs.

“Perhaps it could be the better pick for the medium term. But, again, it depends on valuation. Food players such as Kawan Food and Oriental Food Industries Holdings Bhd could still hold their value over the short to medium term.”

Oriental Food shares have managed to reverse losses in the recent market turmoil with a 4.7% gain YTD.

Wan notes that the current share prices of companies in the retail sub-segment are quite reflective of their value.

“They have not bounced back to the pre-Covid 19 levels. A lot of estimates are already showing that earnings of retailers are likely to be affected quite significantly, with [a drop of] more than 10% for the year.”

Rakuten’s Yee cautions that valuations of consumer stocks are a bit high at the moment, hence his “neutral” call on the sector.

Meanwhile, Areca’s Wong advocates bottom-up selection in the consumer sector. For example, if the share price of sin stocks fall significantly, they could be a good buy, given that it is hard for people to change their habit of smoking and drinking.

YTD, the consumer index has declined 16.4% against the benchmark FBM KLCI’s 13.3% drop.

Within the consumer sector, F&B stocks generally have been performing better than retail and sin stocks.

Big names at shopping malls, however, such as Aeon Bhd, Padini and Parkson Bhd, have been adversely affected by the MCO. YTD, their share prices have shrunk 16.9%, 22.8% and 52.3% respectively.

Wong also says the multi-level marketing segment is seeing a slowdown, with YTD share prices of Hai-O Enterprise Bhd and Amway (Malaysia) Holdings Bhd declining 13.5% and 13.1% respectively.

“They have to [tweak their business] model. It is okay to continue with person-to-person selling provided what you sell is not available on the web.”

Three consumer stocks that could see investor interest are QL Resources, Nestlé and Berjaya Food Bhd.


QL Resources the largest egg producer in Asean

QL Resources has seen a speedy recovery in its share price since the market selloff in March.

An analyst believes there is limited upside to the stock’s share price for now; it is trading at a price-earnings ratio (PER) of 51.9 times.

The risk to the company’s business is a high dependency on the poultry business.

As one of the biggest egg producers in Asean, QL Resources has a daily production rate of 5.7 million eggs. It produces about 50 million day-old chicks and 22 million broilers annually across poultry farms in Malaysia and Indonesia.

It is also the master franchisee of convenience store FamilyMart in Malaysia.

For the nine-month period ended Dec 31, 2019, QL Resources reported a 13.2% y-o-y rise in net profit to RM196.35 million, from RM173.52 million, thanks to higher contribution from marine product manufacturing and integrated livestock farming.

At last Wednesday’s close of RM8.05, its market capitalisation stood at RM13.06 billion.


Nestlé continues to deliver

Analysts believe brands such as Nestlé will continue to deliver good performance, even though Covid-19 is taking a toll on the economy, which could cause a sharp fall in consumer spending.

Despite the challenging landscape, the company says it will continue with its investment plan in Malaysia, setting aside RM280 million in capital expenditure for 2020.

In the latest quarterly results, the food giant registered a 20.8% y-o-y decline in net profit to RM186.31 million, from RM235.22 million, owing mainly to the impact of Covid-19 on out-of-home channels (lower sales leading to lower absolute margins), higher commodity costs and the earlier Chinese New Year this year.

Nestlé is maintaining its 95% dividend payout policy, though. Its share price has contracted 5.2% YTD to close at RM139.30 last Wednesday, giving it a market capitalisation of RM32.67 billion.


Value emerging in Berjaya Food

“Berjaya Food could be worth a look if its share price falls below RM1,” an analyst says.

A reason to pick up this stock is the company’s ownership of Starbucks Coffee stores in Malaysia and Brunei. It also holds the Kenny Rogers Roasters franchise.

Berjaya Food posted a net profit of RM8.01 million in the second quarter ended Dec 31, 2019 on revenue of RM184.12 million. No comparative figures were presented because of a change in its financial year-end from April 30 to June 30.

It is worth noting that its results for FY ending June 30, 2020 will be adversely affected by the adoption of MFRS 16, as almost all its operating outlets are on lease.

Its shares closed at RM1.15 last Wednesday, giving it a market capitalisation of RM439.46 million.


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