Affin Hwang Research retains Neutral on consumer sector
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Affin Hwang Capital Research is retaining its Neutral sector rating on the consumer sector and recommends stocks with solid track records and high yields, with Heineken as its top pick.
It said on Monday while the Q3, 2016 earnings mainly disappointed, it believes consumer spending will recover slowly in 2017 as the consumer sentiment index should pick up, backed by positive government initiatives.
“Sector net profit fell by 26% YoY, with six of nine of our companies below expectations. We changed two ratings this round: we upgraded BAT to Hold on a share-price retraction which brought about more attractive dividend yields; and we downgraded MSM to Sell, as raw sugar prices have risen strongly, hurting margins.
“We also recently upgraded Hai-O to Hold on better-than-expected growth in its multi-level marketing (MLM) division,” it said.
Affin Hwang Research pointed out that while the Malaysian Institute for Economic Research (MIER) consumer sentiment remained low at 73.6 in 3Q16 – a slight pickup from an all-time low of 63.8 in 4Q15 since the global financial crisis – it was still below the 100-point threshold.
According to Nielsen, Malaysian consumers are among the least confident in Asia Pacific. Given potentially higher transport costs and food prices partly due the removal of the cooking oil subsidy, it forecasts a higher full-year inflation rate of 2.7% in 2017 (vs. 2.2% in 2016E).
“We also recently upgraded Hai-O to Hold on better-than-expected growth in its multi-level marketing (MLM) division,”
Comparatively, MIER’s retail trade index improved to 111.6 in Q316, above the 100-point threshold, which seems to indicate that expected sales and business conditions will strengthen.
Retail Group Malaysia forecasts 5% on-year growth in 2017 (vs 3% on-year in 2016E and 1.4% on-year in 2015), expecting a boost on increased tourist arrivals. Budget 2017’s key initiative to increase government aid under the BR1M scheme by as much as 20% with an allocation of RM6.8bil and special assistance of RM500 to all public servants should also help boost consumer spending.
“Nonetheless, the retail sector remains challenging, with earnings before interest and tax (EBIT) margins and same-store-sales growth in a downturn. The F&B segment will likely be hit by higher raw material prices moving forward.
“While the tobacco segment lacks positive catalysts, BAT’s share price has come down and now offers dividend yields of 5% or more, on our estimates.
“We are generally still positive on the brewery sector, which had done well in previous quarters, and we like our two stocks, Heineken and Carlsberg, for their dividend yields.
“We expect domestic consumer spending to recover slowly in 2017, as consumer sentiment is expected to improve from its low base, supported by stable labor market conditions and a large young population. Maintain Neutral. We advise investors to focus on companies with defensive characteristics and attractive dividend yields,” said Affin Hwang Research.
Questions & Answers
Q.Which specific company did Affin Hwang Research upgrade to Hold and why?
Which specific company did Affin Hwang Research upgrade to Hold and why?
Affin Hwang Research upgraded BAT to Hold because its share price retraction resulted in more attractive dividend yields. They also upgraded Hai-O to Hold due to better-than-expected growth in its multi-level marketing division.
Q.What is the forecast for Malaysia's inflation rate in 2017 and what are the contributing factors?
What is the forecast for Malaysia's inflation rate in 2017 and what are the contributing factors?
The forecast for Malaysia's inflation rate in 2017 is 2.7%. This is partly due to potentially higher transport costs and food prices, following the removal of the cooking oil subsidy, as well as higher raw material prices for F&B.
Q.Despite a challenging retail sector, what is expected to boost consumer spending in 2017?
Despite a challenging retail sector, what is expected to boost consumer spending in 2017?
Consumer spending is expected to be boosted by an increase in government aid under the BR1M scheme and special assistance for public servants. Increased tourist arrivals are also anticipated to contribute to stronger sales.
Q.Why does Affin Hwang Research recommend Heineken as its top pick in the consumer sector?
Why does Affin Hwang Research recommend Heineken as its top pick in the consumer sector?
Heineken is recommended as a top pick because it is part of the brewery sector, which has performed well. The research firm generally remains positive on the brewery sector and likes Heineken for its dividend yields.
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