Consumer spending to slow down in 2014

PETALING JAYA (Jan 9, 2014): Hong Leong Investment Bank (HLIB) expects the gap between the Consumer Index and the FBM KL Composite Index (FBM KLCI) to narrow this year as consumer spending slows down as a result of removal of subsidies, which will push up the cost of living. Typically, the Consumer Index outperforms the FBM KLCI.
"After a momentous year in 2013, we expect consumer sector to mellow down in 2014 as we expect private consumption growth to taper from tighter financing conditions, erosion of spending power by higher inflation and waning of wealth effect," said HLIB analyst Grace Chew.
"Simultaneously, we foresee consumer spending to experience slower growth from lower purchasing power/disposable income due to subsidy removals," she said in her report yesterday.
"As such, mid-to-higher end food and beverage (F&B) outlets (or discretionary goods) would be slightly impacted from the above impacts," Chew said.
Chew maintained a "neutral" recommendation on the sector with her top picks being Brahim's Holdings Bhd, Oldtown Bhd, and JT International Berhad.
She does not expect Oldtown to record impressive growth under its café chain outlets but the slowdown could be offset by its venture in China once its central kitchen is operational, coupled with its new factory with increased capacity and its growing fast moving consumer goods (FMCG) business outside Malaysia.
"Given all that, we are now turning slightly more positive on the group's prospects and expansion plans for 2014, especially outside Malaysia," Chew said, who upgraded Oldtown from a "hold" to "buy" with a higher target price of RM2.92 from RM2.39 previously.
She said Oldtown's valuations are now more palatable and provide an opportunity for investors to accumulate the stock at the current price.
On the hand, she said, staple goods would be less impacted due to its resilience nature.
For instance, Brahim's, which provides in-flight meals to all passengers carried on more than 35 airline carriers that depart from KLIA, would directly benefit from the rising number in passengers carried by MAS and higher traffic in KLIA and LCCT.
"Furthermore, we are expecting more asset injections to materialise in 2014, coupled with additional earnings from its sugar venture in 2015," Chew said.
She noted that Brahim's in-flight catering business is not directly impacted by the higher costs of livings as meal costs are embedded into the prices of flight tickets.
Another catalyst for Brahim's in 2014 besides growing passengers carried would be the opening of KLIA2 whereby the group would also have an additional F&B outlet and a premium food court in KLIA2.
"As such, we are maintaining our forecasts for Brahim's, expecting group's earnings to grow at 12.56% and 22.4% in FY14 and FY15 respectively," said Chew who maintained her "buy" call on the stock with a higher target price of RM2.64.
She said 2014 would also be a quiet year for brewery and tobacco as these sectors continue to be exposed to the risk of excise duty hike.
"Furthermore, rising costs may result in increase of selling prices for alcoholic beverages, which would then cause the malt liquor market to weaken," she said.
The recent hike in cigarette prices post-excise duty increase is also expected to impact the total industry volume (TIV) in the legal market, while benefiting the illicit players.
TIV is expected to decline by double-digit in 2014 but the quantum of increase in prices would be sufficient to offset the decline in volume.
"As such margins for tobacco players would widen over the longer term," said Chew.
However, she believes that JTI's prospects for 2014 will improve upon switching to 100% imported tobacco leaves, benefiting the group with wider margins as imported tobacco leaves are priced about 20% lower than local tobacco leaves.
"All in all, we remain cautiously optimistic about with the sector as we expect the slowdown in domestic consumer spending to be partially mitigated by higher tourist flows into the country in conjunction with Visit Malaysia Year 2014," she concluded.