KUALA LUMPUR (July 16): Hong Leong Investment Bank (HLIB) Research has reiterated its ‘underweight’ call on the consumer sector and said it expects the sector to report weak earnings in the second half of 2020 (2H20) while adjusting to the ‘new normal’.

HLIB Research analyst Gan Huan Wen expects retailers such as Aeon Co (M) Bhd with a ‘sell’ rating and target price of 86 sen, Focus Point Holdings Bhd (‘hold’, TP: 43 sen) and F&B player Berjaya Food Bhd (‘sell’, TP: 90 sen) to report weak second quarter (2Q) earnings and remain sluggish in 2H20 given consumer’s reticence to return to shopping malls due to Covid-19 risk, absence of spending from tourists as well as higher unemployment leading to consumers becoming more careful with their spending.

While he expects volumes to bottom out in 2Q20 from the impact of the Movement Control Order on drinking venues and temporary ceasing production operations of brewers, he said tepid volumes will likely persist into 2H20.

“We estimate out-of-home consumption of beer for Malaysia accounts for 40%-50%. Additionally, we note that both brewers will incur significantly higher marketing costs from their respective marketing campaigns (Heineken: ‘Raise Our Bar’ and Carlsberg: ‘Adopt-A-Keg’) which [are] aimed at providing financial support to bars which carry their products by giving consumers deals such as ‘buy 1 free 1’ borne by the brewers. Heineken (‘hold’, TP: RM22.45), Carlsberg (‘sell’, TP: RM21.00).

“We reckon British American Tobacco (M) Bhd (BAT) faces an uphill battle going forward to reclaim consumers that have shifted their spending patterns to buying vape and illicit cigarettes (priced at just RM5/pack vs between RM12-18/pack for BAT’s cigarettes), particularly given consumers reduced spending power. BAT (‘sell’, TP: RM10.60),” Gan said in a note today.

Gan noted prices for most key commodities for consumer staples under his coverage since the start of FY20, namely Nestle (Malaysia) Bhd (‘sell’, TP: RM100.55) and Hup Seng Industries Bhd (HSI) with a ‘hold’ rating and target price of RM1 have declined significantly due to weaker demand from the outbreak.

“However, we do not expect significantly better margins from cheaper raw material costs due to the weaker ringgit (currently at 4.26/USD vs 4.09/USD at the start of the year); and increased operating costs associated with safety measures being implemented in response to Covid-19,” he added.

However, he named his top pick as HSI, adding that the group’s dividend yield of 6.4% remains attractive at this time of uncertainty.