Maintain neutral: Our consumer sector universe recorded third quarter of 2018 (3Q18) core earnings growth of 8% year-on-year (y-o-y) primarily driven by large-cap consumer staples. However, our expectations of a tax holiday boost did not materialise meaningfully, particularly for retail players which saw earnings disappointment and quarter-on-quarter (q-o-q) revenue declines. We do not discount the possibility of earnings improvement in 2019, as spending patterns normalise supported by a positive macroeconomic backdrop. We maintain our “neutral” sector call with QL Resources as our top pick.
For nine months of 2018, the consumer sector recorded core earnings growth of 8% y-o-y mainly driven by the strong performance of sector bellwethers — Nestle and QL Resources. However, 3Q18 showed relatively disappointing earnings performance overall with most companies under our coverage reporting earnings that tracked behind our forecasts.
While we had previously expected the tax holiday period to boost sales especially of retail players, this did not materialise. In fact, most of the retail stocks recorded q-o-q revenue declines during the period. The retail players under our coverage also recorded a decline in margins, due to higher advertising expenses, and adverse repricing strategies during the re-implementation of the sales and service tax. We believe that the shift in spending towards larger-ticket items such as automotives and large electronic items dampened retail sales during this period.
Despite the disappointment, we believe the macroeconomic backdrop will still hold up moving forward. The MIER Consumer Sentiment Index remains in positive territory in 3Q18 at 107.5 points despite coming off its multi-year high of 132.9 points in 2Q18.
Moving into 2019, we believe that private consumption will continue to be supported by healthy expansion in income, steady employment, as well as consumer-friendly policies. — Affin Hwang Capital Research, Dec 5