This article first appeared in The Edge Financial Daily on January 29, 2019

Consumer sector
Maintain market weight: Broad indicators point to a modest 2019. Consumer sentiment is likely to remain cautiously optimistic. This is further backed by UOB Kay Hian’s moderate 2019 private consumption assumption of 7% (2018: 7.5%). It translates into our forecasted sector earnings of 8.5% year-on-year for 2019. We also think the sales and services tax fears are overplayed, with headline inflation seeing a 0.6% growth month-on-month in September 2018. We particularly like the brewery sub-sector for its growth visibility, it being a laggard play in terms of valuation rerating and with the sector unlikely to see an excise duty hike.

But disruptive developments could deliver complications. Our conversations with beverage producers suggest a potential sugar tax-led average selling price hike could have devastating consequences to volume consumption. However, efforts to reformularise and perhaps repackage to smaller units to facilitate better affordability by Fraser & Neave Holdings Bhd could stem a potential decline. Separately, Philip Morris International Inc finally launched its prominent cigarette alternative locally. This, coupled with tightening health policies on smoking, could further undermine British American Tobacco (M) Bhd (BAT) market share.

Given the healthy consumption outlook heading into 2019 and with commodity prices still trending rather favourably, we expect earnings to be sustained in 2019. That said, valuations are currently lofty after experiencing a rerating. Current price-earnings (PE)-to-growth [2017-2019] valuations of Nestle (M) Bhd (9.5 times) and QL Resources Bhd (3.3 times) in particular are well above the FBM KLCI component members’ average of three times, let alone defensive FBM KLCI (consumer staples, utilities and healthcare) peers’ average of 2.6 times. Given the lofty valuations, we see little further upside.

Sell Nestle, QL Resources and BAT. We expect both Nestle and QL Resources to deliver healthy 2019 earnings growth of 6% and 15% respectively. However, valuations are stretched at 45.9 times and 41 times 2019 PE respectively, and are well above comparable five-year historical mean PEs. The reward-to-risk trade-off is especially uncompelling. Meanwhile, apart from valuations being detached from their respective means, BAT is plagued by stiffening competition and significant regulatory risk.

We prefer Heineken Malaysia Bhd in the visible brewery segment backed by decent yield. We expect Heineken (buy, target price [TP]: RM24.50) to manoeuvre 9.2% earnings growth in 2019, slightly outstripping its 5% top-line growth against the absence of advertising and promotion commercial spend tied with the Fifa World Cup in 2018. We see potential for further upside as Heineken’s valuation gap with the food and beverage sector narrows. Accordingly, we lower our weighted average cost of capital to 6.8%, which raises our TP to RM24.50 (from RM21). Our discounted cash flow-based TP implies 24 times 2019 forecast PE, at +1 standard deviation of its three-year PE trading band but in line with Carlsberg’s Brewery Malaysia Bhd’s valuations. — UOB Kay Hian, Jan 28