PETALING JAYA: Higher commodity prices and the implementation of the proposed targeted fuel subsidy are expected to impact food producers’ profit margins this year, according to a note from HLIB Research.
To that end, it is revising down its call on the sector to “underweight” from “neutral”.
The research house said it expects consumer companies to be hit by higher commodity prices, as coffee prices are likely to rise by 1.5% in 2020 due to a decline in production brought on by weather issues in key coffee producing markets including Honduras, Brazil and Peru.
Furthermore, it expects crude palm oil (CPO) price to average RM2,400/mt in 2020 from an average of RM2,244/mt in 2019 due to supply shortages in Malaysia and Indonesia.
“Note that CPO has surged 59.2% since mid-2019 to RM3,118/mt currently. Higher coffee and CPO prices amongst other commodities are expected to put margin pressure on food producers,” it said.
Meanwhile, it noted that the targeted fuel subsidy is expected to have a negative impact on consumer discretionary spending habits.
The weak consumer sentiment of 84 also exhibits the overall weak consumer spending outlook going into 2020, and HLIB Research said it expects retail sales to continue its decelerating growth.
“Malaysian retailers posted weaker retail sales growth in 2019 vs 2018, averaging just 7.7% in 2019 vs. 11.0% in 2018.
“Retail Group Malaysia attributed this slowdown to limited domestic policies to stimulate consumer spending in addition to weaker consumer sentiment which was due to slower export growth, declining stock market activity and weakening ringgit,” it said in the note.
Furthermore, HLIB Research said going into 2020 it anticipates the absence of significant consumer spending stimulus domestically while the ongoing global trade tensions continue to result in tepid retail growth.
However, the research house said it has a favourable view on Heineken Malaysia Bhd and Carlsberg Brewery Malaysia Bhd, as both companies have reported top line growth in 9M19 of 20% and 15.5%, respectively.
“Both companies attributed better top line to growth in premium brands but also intensified enforcement in illicit alcohol trade.
“Going into FY20, we expect the government to continue their efforts in reducing illicit trade, evidenced by the government’s stance on cracking down on illicit alcohol trade in lieu of increasing Malaysia’s alcohol excise duty structure,” said HLIB Research, adding that the increased efforts will result in volumes flowing back to legal players.
Its top pick for the sector is Heineken with a target price of RM28.90.
Higher coffee and CPO prices are expected to put margin pressure on food producers. – REUTERSPIX
