Outlook for consumer sector will remain challenging

PETALING JAYA: The outlook for the consumer sector is expected to remain challenging in the second half of this year (2H17), on the back of high raw material prices and lackluster consumer sentiment.
"While prices of some key commodities have fallen of late, we note that average prices of most raw materials year-to-date are still higher compared with previous year. This will result in further margin pressure to relevant consumer sector players which may force them to pass on costs to consumers going forward," Hong Leong Investment Bank (HLIB) Research said in a report yesterday.
The consumer sector players that may be affected are Berjaya Food Bhd (BFood), Oldtown Bhd and Nestle (Malaysia) Bhd.
Among the six key raw materials, average prices for year-to-date 2017 compared with 2016 have been on the rise for robusta, arabica, whole milk and palm oil, with only cocoa and sugar recording decreases in average prices.
"Additionally, note that despite strengthening recently from a low of 4.49 for the year, the average MYR/USD for 2017 and current exchange rate of 4.39 and 4.29 still remain weaker than 2016's average of RM4.22 per US dollar," said HLIB Research.
Meanwhile, consumer sentiment rebounded from 69.8 points in 4Q16 to 76.6 points in 1Q17 and this was mainly due to a low base effect.
HLIB Research expects consumer sentiment to remain subdued at current levels, although the government will continue to stimulate consumer spending with BR1M payments (in February, June and August this year) after raising the minimum wage and cutting workers' contribution to Employees Provident Fund last year.
"We note that food producers have been raising prices to pass on higher production cost arising from weaker ringgit. We also believe these producers will likely raise selling prices further (in a gradual manner) to further pass on higher production cost.
"We opine that such a move will dissuade consumers from consuming more, evidenced by a research finding by Nielsen, which found that 85% of Malaysians believe that the nation is currently in a recessionary state," it added.
Looking at the results of consumer stocks under its coverage, four out of six stocks came in below expectations due to poor consumer sentiment domestically, weak ringgit which affected input costs and higher operating costs from the hike in minimum wage.
The results of Aeon Co. (M) Bhd, Brahim's Holdings Bhd, BFood and QL Resources Bhd came in below expectations while Nestle and Oldtown was in line with expectations.
"Over the past three years, companies have been mostly stomaching higher costs from weaker ringgit (higher raw material costs) and higher labour costs from minimum wage hike in July 2016 as evidenced in core net profit narrowing year-on-year.
"With the relaxation of the Anti-Profiteering and Price Act in 2017, we expect companies to continue to gradually pass on costs to consumers going forward, which we have already seen occurring in 2017 so far," it said.
It maintained its "neutral" stance on the sector. Less-than-favourable near-term earnings outlook aside, it said that consumer stocks are already trading at historical highs.
"The KL Consumer Index is currently trading above two standard deviations of its five-year average (21.4 times). In the absence of near-term earnings recovery in sight, we believe it is unlikely for the sector to be re-rated anytime soon," it added.
There are no top picks for the sector as it believes that consumer stocks are already trading at rich valuations.