Profit-taking pulls down consumer stocks

This article first appeared in The Edge Financial Daily, on March 16, 2018.
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KUALA LUMPUR: Some consumer stocks, which hit all-time highs in recent trades, closed sharply lower for a second straight day yesterday as investors took profit on recent gains amid concerns that most of these stocks may have become overvalued.

The Bursa Consumer Product Index was the biggest loser, down 16.56 points or 2.37% to close at 681.32 points. The broader market also came in lower, with the FBM KLCI closing 11.79 points or 0.64% lower at 1,845.27.

The appetite for a reliable defensive sector has led to consumer stocks like Nestle (Malaysia) Bhd, a constituent of the FBM KLCI, hitting all-time highs in recent trades, making it the highest-priced counter on Bursa Malaysia.

Recall that the year-to-date (YTD) market capitalisation gain of Nestle on Monday itself would have been enough to buy the world’s most expensive football club — Manchester United FC.

However, Nestle’s has lost some RM6.19 billion in market value over the past two days, from its peak level of RM36.91 billion on Tuesday. The stock fell as much as 11.3% to hit an intraday low of RM125 yesterday, before paring some losses to close at RM131, down RM10 or 7.09% from the previous day’s close. Its market cap stood at RM30.72 billion.

Despite the decline in the past two days, Nestle still managed to record a YTD total return of 26.9%. At the current level, the big-cap stock is still trading at a trailing price-earnings (PE) of 47.6 times.

According to data compiled by Bloomberg, four out of 11 analysts covering Nestle have a “sell” call on the stock, while the remaining seven recommend a “hold”. The average target price (TP) is RM111.17, implying a 15.1% decline over the next 12 months.

Nevertheless, Hong Leong Investment Bank Bhd analyst Gan Huan Wen believes that the time is still not ripe to accummulate Nestle shares given its high valuation. He has a “neutral” view on consumer stocks.

A fund manager told The Edge Financial Daily that the market remains “positive” on defensive stocks, but has made a rotational play into the banking and commodity sectors in view of the huge profit-taking opportunities that have presented themselves in the last few days.

Apart from Nestle, another consumer stock that did not escape the recent selldown is Dutch Lady Milk Industries Bhd, which saw its share price fall 5.1% to RM67.54 in the last two days. The stock is trading at a trailing PE of 36.7 times and has seen a return of 8.9% YTD.

Two of the analysts covering the company have a “sell” call on the company with a 12-month TP of RM60.18, indicating a potential decline of 10.9%.

Fraser & Neave Holdings Bhd’s (F&N) share price also edged lower by 5.55% to RM31 from RM32.90 in the last two days. Similar to Nestle and Dutch Lady, F&N is also trading at an expensive valuation with a trailing PE of 37.5 times. In comparison, F&N’s average PE in the last five years is at about 24.8 times.

Analysts who are covering F&N, however, are more positive, with two maintaining a “buy” call, while the remaining four are recommending a “hold” call on the stock. The 12-month TP of RM30.51 is slightly lower than its current level of RM31.

An analyst with a local asset management is of the view that the jitters surrounding the upcoming 14th general election and the opportunity to take profit have led to the sharp fall in the last two days.