Large-cap staples likely to lead consumer sector growth

This article first appeared in The Edge Financial Daily, on March 9, 2020.
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Consumer sector
Maintain neutral:
The start of 2020 has been turbulent, starting with the outbreak of Covid-19, followed by an unexpected change in the Malaysian government. 

Nonetheless, we expect incentives announced earlier under Budget 2020 and the recent RM20 billion financial stimulus to remain intact, and thereby sustain spending on essential goods. 

Thus, we broadly favour the staple producers over retailers. We project the sector’s estimated 2020 (2020E) core earnings per share (EPS) growth of 4.4% year-on-year (y-o-y), mainly driven by large-cap staples (Nestle (Malaysia) Bhd and QL Resources Bhd).

The consumer sector aggregate core earnings rose 8.8% y-o-y for the fourth quarter of 2019 ended Dec 31 (4Q19), largely lifted by better performance from PPB Group Bhd and British American Tobacco (Malaysia) Bhd (BAT). PPB’s earnings were boosted by higher contribution from grains and agribusiness while BAT saw a higher seasonal volume sales trend over the period. Seven of the 11 companies posted results that were broadly in line with expectations.

2020 is set to be a challenging year amid the outbreak of Covid-19 which will likely stretch beyond 1Q20. The recent change in government also raises potential policy risks over the near term. 

Nevertheless, we do not expect any drastic changes to the cash assistance and broad-based incentives announced earlier under Budget 2020 and the recent RM20 billion financial stimulus package; this should keep consumer spending afloat especially among the lower-income group. As such, we broadly continue to favour the staple producers over the retailers.

In tandem with Affin’s 2020E gross domestic product growth downgrade to 4% (from 4.5%), we had lowered our overall sector earnings forecast by about nine percentage points in the recent results season. 

Post-revision, we project overall sector EPS to recover by 4.4% y-o-y for 2020, subsequent to the 6.5% y-o-y contraction in 2019. We expect 2020 growth to be led mainly by large-cap staples such as Nestle and QL Resources in addition to MSM Malaysia Holdings Bhd turning around to a core profit in 2020.

Overall, we believe the consumer sector forward price-earnings ratio of 29 times (one standard deviation above five-year mean) remains rich but sustainable given its resilient earnings delivery and decent dividend yields. 

Our sector top pick remains QL Resources (12-month sum-of-the-parts-derived target price of RM9.30), given its robust long-term earnings prospects, and the growing Family Mart operation that is likely to contribute more meaningfully to group earnings. Our other buy calls within the consumer space are Ajinomoto (Malaysia) Bhd, Heineken Malaysia Bhd and Perak Transit Bhd. — Affin Hwang Capital, March 6