KUALA LUMPUR (Feb 9): Following two consecutive records in Malaysia’s monthly distributive trade sales value in Nov and Dec 2021, consumer-related companies could be riding on further recovery with the economy seen to remain open in 2022 despite the Omicron wave of Covid-19 cases.

Notably, analyst coverage across retailers, consumer staple counters as well as breweries and tobacco players saw 65% ‘buy’ calls, followed by 27% ‘hold’ calls with ‘sell’ calls making up the remaining 8%, Bloomberg data showed.

Areca Capital chief executive officer Danny Wong Teck Meng told The Edge that prospects in the consumer sector are positive, as the current Covid-19 situation appears manageable owing to the high vaccination rate among the population.

However, investors must be mindful when going into sub-sectors where costs and pricing power are in play, while consumer trends have also changed, the fund manager said.

“As opposed to pre-Covid days, automation and online operations have now become the norm. Those who stick to the old ways of doing business may face challenges.

“Secondly, inflation is coming. The government is forced to look at minimum wage, which is a cost consideration for labour-intensive businesses, especially those with many low-skilled workers.

“With rising costs, companies that are unable to pass them down to consumers may see margin squeeze, such as those who are in the business of controlled items,” he added.

Meanwhile, HLIB Research analyst Syifaa’ Mahsuri Ismail said the research house has a “neutral” call on the sector.

This is on expectation of varying degrees of recoveries across its coverage, although government assistance packages and labour market could aid consumer spending in 2022.

“We are more optimistic on retail players on the back of the full resumption of the economy.

“As for staples, we view that the spectre of elevated commodities and freight costs still lingers, hence undermining margins despite the recovery in sales,” Syifaa’ told The Edge.

As at Feb 10, the Bursa Malaysia Consumer Products & Services Index was still down 12.04% from end-2019 levels. Bloomberg data showed that the index is currently trading at around 23 times historical and future price-to-earnings ratio (PER). This is as opposed to around about 30 times PER average in 2017-2019, rough calculations showed.

To identify opportunities in the sector, Wong suggested comparing current and future PER with three-year average pre-Covid-19.

HLIB’s Syifaa’ pointed out that said that pre-Covid, stocks covered by the research house traded at around 20-25 times PER. They are currently around 25 times PER, she said.

Notably, PER multiples of companies covered by analysts are above historical levels. But consensus target prices (TP) are largely higher than trading prices, with healthier valuations relative to 2023 earnings forecasts owing to the prolonged recovery path.

HLIB Research’s top picks are home retailer Mr DIY Group (M) Bhd (target price: RM4.51) and Focus Point Holdings Bhd (TP: RM1.03).

“We expect Mr DIY’s steady store expansion and omni channel strategy (online, Touch ‘n Go collaboration) to shore up the company’s profitability in line with the clearer recovery picture,” she said.

Notably, the company had revised prices towards end-2021 to address rising freight costs, and is currently clawing back market share with a campaign to keep prices unchanged at this point. It also commands higher margin for some products compared with pricier competitors.

Meanwhile Syifaa’ also sees opportunities in Focus Point’s scalable business model. “We reckon that both optical and F&B segments are able to ramp up fully once operating conditions normalize. Furthermore, we expect high probabilities of securing new F&B corporate clients given the popularity of its current product offerings,” she said.

But while people are spending again in 4Q2021, a senior economist opined that it is mainly due to the reopening and does not reflect extraordinary pent-up demand.

“Seasonally-adjusted numbers appear to be in contraction still, apart from motor vehicle sales. During a recession, seasonally-adjusted numbers tell us a better sense of a tipping point,” the economist told The Edge.

“I believe consumers are still apprehensive about spending, and the private sector is not spending as much as they should as well. This may have to do with the government not giving the right signals to the market in terms of policy direction,” the economist added.

Malaysian Institute of Economic Research (MIER), in its latest Consumer Sentiment Index survey release found that consumers have turned less positive about near term financial outlook, with mounting fears on higher prices.

Interestingly, this was despite consumer spending plans taking a more ambitious turn where they “are all set to go shopping soon”, including for big-ticket items as well as large electrical goods. The Consumer Sentiment Index, in 4Q2021, fell again below the optimism threshold after a temporary rebound in 3Q2021, the survey dated Jan 26 showed.