Consumer sector kept at ‘neutral’

PETALING JAYA: AmInvestment Bank Bhd is retaining its “neutral” rating on the consumer sector, with the upcoming Budget 2018 announcement not expected to lift consumer sentiment significantly.

Analyst Philip Wong said he does not expect Budget 2018 to notably lift consumer sentiment in view of the rising cost of living, elevated household debt and eroding affordability plaguing consumers.

“Diminishing goodwill consumer sentiment brought about by an expected BR1M programme is likely to remain weighed by the rising cost of living, elevated household debt and eroding affordability as Malaysian consumers are undergoing the longest period of pessimism in its history.

“It surpasses those of the Asian financial crisis and global financial crisis in 1997 and 2007 respectively. Recovery has been protracted and we expect the status quo to extend in the near future.” In a note today, it said that risk factors such as the weakening ringgit, competition and soft consumer sentiment have either largely diminished or bottomed.

Nevertheless, Wong said the impending outlook remains weighed by a tepid recovery. Bonia Corp Bhd and Berjaya Food Bhd are its top picks.

He said the research house favours Berjaya Food with a fair value of RM1.77, for its attractive growth off a low base, offering a three-year earnings compound annual growth rate of 22%; innovative, yet resilient Starbucks brand; and rationalisation of non-performing stores that have positioned Kenny Rogers Roasters Malaysia to see two consecutive quarters of positive same store sales growth.

Meanwhile, Wong said Bonia is attractive for its Braun Buffel brand commanding a regional appeal with Indonesia spearheading growth; closure of its underperforming consignment stores to alleviate FY18F earnings growth; and attractive valuations, which trades at a forward price to earnings (P/E) of 12.5 times, below its five-year historical average P/E of 14.5 times.

Wong said two scenarios that may carve out opportunities within the sector over the next 12 months, include strengthening of the ringgit and slump in commodities prices, noting that Berjaya Food and Padini are beneficiaries of a stronger ringgit.

Moreover, he said the research house also expects similar targeted measures during the upcoming budget as with the previous budgets, but believes it is unlikely to be game-changing.

Wong said it envisioned the government would continue lending support to civil servants and the middle and lower income group or bottom 60% (B60) to sustain consumer spending, which accounts for more than 50% of the economy.

The government previously distributed RM5.9 billion and RM6.8 billion in 2016 and 2017 respectively, through its BR1M programme. Apart from that, he said the government’s policy to reduce employees’ contribution to the Employees Provident Fund by 3 percentage points to 8% may be extended beyond the effective time frame of end-December 2017.

Wong added the research house does not expect minimum wage to be altered, as most companies have absorbed higher labour cost while having to combat a shortage of foreign labour.