Analysts see further upside for retail stocks

This article first appeared in The Edge Financial Daily, on June 18, 2018.
-A +A

KUALA LUMPUR: More upside is seen for locally listed retail stocks which received a major shot in the arm with the zero-rating of the goods and services tax (GST) two weeks ago.

Analysts said the stocks have more room to run at least until the tax-free holiday comes to an end with the reinstatement of the sales and services tax (SST) on Sept 1.

They said the effective removal of the GST meant the masses have bought, or are planning to buy, more items that were previously subjected to the tax.

“I believe this window of a tax-free period will spur spending, typically in retail and luxury or household products such as cars and furniture,” said Areca Capital Sdn Bhd chief executive officer Danny Wong.

“Some stocks have seen a change in trends. I believe almost all consumer stocks will see some upside this quarter,” Wong said when contacted, adding that the upside differs only in the extent.

The government’s announcement on the reduction of the GST rate from 6% to 0% effective June 1 was made on May 16. Within five days post-announcement, the Bursa Malaysia Consumer Product Index had risen nearly 3% to an all-time high of 743.22 points. The index settled at 740.16 points last Thursday.

Wong said the improved sentiment could continue post-tax holiday, depending on the strategies adopted by retailers in maintaining sales from plunging on a high-base effect.

The SST has been hailed as a less painful tax for consumers as it has a straightforward taxation concept, unlike the GST which involves multiple stages.

Another analyst, speaking on condition of anonymity, said that of the retail stocks under his coverage, the “clear-cut winner” is Aeon Co (M) Bhd, which is enjoying good sales, thanks to the zero-rating of the GST and Hari Raya festivities.

“It is one of the few retail stocks that have ‘legs’, ” he said. “But this remains contingent on not just how well they do in sales these two quarters, but also on how well they undertake their cost optimisation in efforts to improve margins.”

The share price of Aeon Co — which operates 34 stores and 26 shopping malls in Peninsular Malaysia — has appreciated 37.5% year-to-date. The stock closed one sen higher at RM2.42 last week, and is currently trading at a price-earnings ratio (PER) of 33.43 times.

The retailer, which has been in operations for more than three decades, turned in a record high revenue of RM4.09 billion for the year ended Dec 31, 2017.

According to another analyst, Bonia Corp Bhd is also a counter worth taking a look as its shares could benefit from the higher spending by consumers.

“But it is unsure how much could be translated into the company’s bottom line, considering that Bonia is currently undergoing store consolidation,” he told The Edge Financial Daily.

This is despire the fact that Bonia shares are trading at a PER of 16.4 times, which the analyst said is warranted given the company’s  lacklustre corporate earnings in the past few quarters.

The fashion retailer, which mainly sells leather goods such as footwear, handbags and accessories, saw its net profit for the third quarter ended March 31, 2018, contract 73% to RM1.28 million, from RM4.76 million a year earlier.

Its share price has fallen 34.7% from its high of 65.8 sen in October 2017 to 43 sen at the close of trading last week.

Areca’s Wong said the higher demand seen by retail stocks could also be driven by investors switching from counters that were once the “darling” of the stock exchange to new counters, besides the zerorisation of the GST.

With the government reviewing mega projects, investors are left with little choice due to the lingering uncertainties in stocks that are especially related to construction and building materials, he said.

Wong advised investors who have jumped on to the retail bandwagon to keep a close eye on further announcements, as it is expected that sales will slow down after the tax-free period.