KUALA LUMPUR (Jan 6): Hong Leong Investment Bank Research (HLIB) has downgraded the consumer sector to "Underweight" from "Neutral" in view of higher commodity prices and tepid consumer spending in 2020.

In a sector note today, HLIB said many fast-moving consumer goods producers — Nestle (M) Bhd, Hup Seng Industries Bhd, Fraser and Neave Holdings Bhd and Dutch Lady Milk Industries Bhd — and food and beverages players' profitability are tied to commodity prices.

It said that looking ahead into 2020, it expects consumer companies to be hit by higher commodity prices.

"While global coffee consumption is expected to rise by 1.5% in 2020, the International Coffee Organization expects coffee production to decline by 0.9% led by weather issues in key coffee producing markets including Honduras, Brazil and Peru," it said.

The research house noted that this is expected to result in significantly higher coffee prices, which have surged by approximately 12.7% since end-November.

HLIB also expects crude palm oil (CPO) price to average RM2,400 per metric tonne in 2020 (from average RM2,244 per metric tonne in 2019) due to supply shortages in Malaysia and Indonesia.

It further noted that the higher coffee and CPO prices amongst other commodities are expected to put margin pressure on food producers.

The research house stated that the blanket subsidies on fuel will be replaced by a subsidy scheme that captures a narrower pool of drivers, although the implementation timeline has been delayed.

Additionally, weak consumer sentiment of 84, which is lower than the 100 threshold, exhibits the overall weak consumer spending outlook going into 2020, where HLIB expects retail sales to continue its decelerating growth.

According to HLIB, the Malaysian retailers posted weaker retail sales growth in 2019 versus 2018, averaging just 7.7% in 2019 versus 11% in 2018.

"Going into 2020, we expect the absence of significant consumer spending stimulus domestically and ongoing global trade tensions to continue to result in tepid retail growth," the research house said.

HLIB noted that both brewers Heineken Malaysia Bhd and Carlsberg Brewery Malaysia Bhd have reported robust top line growth in the cumulative nine months of 2019 (9M19) of 20% and 15.5%, respectively.

Going into FY20, it expects the government to continue its efforts in reducing illicit trade, evidenced by the government's stance on cracking down on illicit alcohol trade in lieu of increasing Malaysia's alcohol excise duty.

"We expect the increased efforts to result in volumes flowing back to legal players," it said.