This article first appeared in The Edge Malaysia Weekly on June 24, 2019 - June 30, 2019

PARKING the bus” — a football term that refers to an ultra-defensive tactic of trying to minimise losses rather than going all-out for the win — will probably be the strategy used by investors in these times of economic uncertainty.

“Given that the consumer sector was of the few that delivered positive returns in the first quarter, it tells you a lot that investors are hunkered down in defensive mode, and are not likely going to give up their safety [nets] yet. Therefore, stocks in the consumer and healthcare sectors will likely be in play as they are defensive sectors,” Inter-Pacific Securities Head of Research Pong Teng Siew tells The Edge.

And investors who bought consumer stocks in the first quarter would have made the right bet, a quick look at 21 selected consumer stocks on Bursa Malaysia shows. Fifteen of these counters in the food, retail and direct selling businesses recorded an improvement in their latest quarterly earnings.

Among the more notable turnaround stories were Berjaya Food Bhd and Power Root Bhd. Berjaya Food, which operates Starbucks cafes and Kenny Rogers Roasters restaurants in Malaysia, among other businesses, returned to the black in its third quarter ended Jan 31, 2019, with a net profit of RM8.98 million compared with a net loss of RM10.85 million a year ago, thanks to higher profit contribution from its Starbucks operations.

The group, which recently changed its financial year end to June 30, reported a net profit of RM4.05 million for the three months ended April 30, 2019, from a net profit of RM837,000 a year ago, due to same-store-sales growth by Starbucks.

Following the release of its consolidated results, CIMB Research, in a June 14 note, reiterated its “add” call on Berjaya Food with a target price of RM2.23, indicating a 34% upside to its closing share price of RM1.66 last Thursday.

“We continue to like Berjaya Food for its healthy earnings prospects, and a stronger-than-expected turnaround in its Kenny Rogers Roasters operations is a key re-rating catalyst,” says the firm.

Beverage manufacturer Power Root Bhd, known for its Alicafé and Ah Huat White Coffee beverages, also returned to the black in its fourth quarter ended March 31, 2019, with a net profit of RM4.96 million compared with a net loss of RM9.84 million a year ago, thanks to a favourable sales mix and lower impairments during the quarter.

“We view Power Root as a proxy to the strengthening of the USD, given its export exposure. Earnings should continue recovering on favourable commodity price and cost rationalisation,” RHB Research says in a June 12 note on consumer products.

RHB Research has a “buy” call on Power Root with a target price of RM2.06, indicating an upside of 31%.

In the retail sector, departmental store operator AEON Co (M) Bhd reported a 17% year-on-year increase in net profit for its first financial quarter ended March 31,2019, to RM32.64 million, thanks to higher retail revenue and margin. As at the end of last year, AEON operated 27 malls in Malaysia.

In a May 31 note, MIDF Research upgraded its call on AEON to “neutral” from “sell” previously, with a target price of RM1.60.

“We are cognisant of management efforts in the refurbishment and maintenance of existing stores in order to stay relevant in the face of competition from surrounding areas. All things considered, we upgrade our stock recommendation to neutral from sell previously,” it says.

Another company that performed exceptionally in its first financial quarter ended March 31, 2019, was Focus Point Holdings Bhd. The group, which is involved in the trading of eyewear and eye care products, and also operates the Komugi bakery chain, saw its net profit surge more than 90 times to RM2.15 million from RM23,000 a year ago due to higher sales of its optical products.

Year to date, Focus Point shares have surged more than 100% to 41.5 sen last Thursday.

However, for some consumer stocks, the latest financials took a turn for the worse.

For its third quarter ended March 31, 2019 (3QFY2019), departmental store operator Parkson Holdings Bhd reported a net loss of RM6.48 million from a net profit of RM25.3 million a year ago.

“We wish to clarify that our operational profit has improved for the current financial period but the higher profit in last year’s comparative quarter included a one-off net gain arising from settlement of litigations,” a company spokesperson tells The Edge.

Parkson operates 44 stores in Malaysia, 44 stores in China, 15 stores in Indonesia and five stores in Vietnam. The group’s only store in Myanmar was shut down last December.

“With the current economic landscape, the group is not aggressively opening new stores but will consider doing so if selective suitable locations are available. We will continue to monitor and review our non-performing stores,” the spokesperson says.

Two key lieutenants left the group recently. In January, Shaun Chong resigned as CEO of Parkson’s 54.59%-owned Parkson Retail Group Ltd (PRG), which is listed on the Hong Kong exchange. A month earlier, Larry Michael Remsen had quit as CEO of Singapore-listed Parkson Retail Asia Ltd (PRA), which is 67.96% owned by Parkson Holdings.

PRG manages the group’s stores in China while PRA owns Parkson’s department stores in Malaysia, Indonesia and Vietnam.

The Parkson spokesperson tells The Edge that group executive chairman Tan Sri William Cheng has currently assumed the CEO roles in both PRA and PRG as the group sources for suitable personnel to fill the positions.

Year to date, Parkson’s share price has risen 4% to 25.5 sen last Thursday.

Meanwhile, fashion retailer Padini Holdings Bhd reported a 13% decline in its net profit for the third financial quarter ended March 31, 2019, to RM34.65 million, due to a drop in gross profit margin. In the previous year, the profit margin was wider because of a reversal of inventories that were written off.

MIDF Research, in a June 7 note, downgraded its call on Padini to a “sell” from “ neutral” previously, with a target price of RM3.02.

“Coupled with subdued consumer sentiment, customers are becoming more price-sensitive and place less emphasis on brand loyalty. In order to protect its market share, we view that Padini does not have much room to revise upwards its products prices.

“In addition, the higher cost of inventories will further exacerbate the compression in profit margins,” the firm says.

RHB Research, in its latest report on the consumer sector, downgraded its call on the sector to “neutral” from “overweight”, citing downside risks from the elevated cost of living, weak commodity prices and valuation concerns over large cap stocks.

Despite that, it acknowledges the resilient attributes of the sector, with its top picks being Padini, Power Root, Berjaya Food and convenience store operator Mynews Holdings Bhd.
 

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