• The recent concluded 4Q23 earnings season for 12 companies under our coverage was largely in line with expectations, with 3 companies surpassing our projections. MSM stood out as the star performer, with results turning profitable.

• We anticipate stable sales growth for staple goods, but margins recovery could face pressure due to rising cost stemming from the unfavorable USDMYR exchange rate and elevated prices in some commodities.

• The discretionary segment is expected to remain challenging, amidst weaker consumer purchasing power especially on big ticket items.

• We are cautiously optimistic on consumer sector in 2024 and maintain a NEUTRAL call on the sector. Our Top pick is MSM and MRDIY.

4Q23 Earnings Mostly Inline

The recent 4Q23 results season for the 12 companies under our coverage was largely in line, with 3 above expectations (MSM, Dutch Lady, Amway). MSM was the star performer, with earnings finally returning to profitability at RM42.9mn in 4QFY23, thanks to incentives received, higher sales volume, and ASP. As for Dutch Lady, results above expectations were driven by a softening in dairy raw material prices, effective cost containment (especially in promotional expenses), and a lower effective tax rate. Meanwhile, Amway outperformed mainly due to lower Opex resulting from significantly reduced sales incentive payouts compared to the previous year. Overall, 4Q23 sector earnings for the 12 covered stocks grew by 34% QoQ and 21% YoY, primarily driven by a strong festive season and year-end sales, as well as overall lower operating expenses. Nevertheless, the FBM KL Consumer Index (KLCSU Index) relative to the FBMKLCI Index underperformed by -7% YoY and -2.4% YTD. We believe this is attributed to lower sentiment due to elevated inflationary pressure, lack of clarity over subsidy rationalisation, unfavourable currency, and fluctuation of commodity prices.

Cautiously Optimistic on F&B 2024 Outlook.

We are cautious about the potential inflationary pressures on companies’ operations ahead, stemming from increases in service tax and the anticipated implementation of subsidies rationalisation initiative (SRI) especially on petrol subsidies in 2H24. These factors are likely to affect consumer demand and raise operating expenditures through direct impacts or cost pass-through from suppliers. However, we remain optimistic for consumer staples sales, considering the inelastic demand for essential items and the spending power of their B40 group customers, who will continue to benefit from various incentives and cash handouts. On the cost front, we are concerned regarding the unfavourable USDMYR currency exchange rate as well as volatility in global commodity prices. We anticipate cocoa, robusta coffee, and sugar prices to remain elevated due to lower supply caused by unfavourable weather conditions in major producing countries. These factors collectively could exert cost and margin pressure on F&B companies under coverage, especially Nestle.

Prefer Value-for-Money Retailer.

Discretionary segment remains challenging in 2024, as spending could be curtailed, especially for big-ticket items, coupled with higher tax rate and heightened operating costs. Retail Group Malaysia (RGM) projects a modest 3.5% YoY growth in Malaysia's retail sector for 2024F, amid increasing costs of living and a softening consumer purchasing power. We anticipate sales for Amway premium products and AEON hardline segment to deteriorate in 2024. Despite the overall challenging outlook for the retail sector, we see value in discretionary stock under coverage, such as MRDIY. This is supported by steady store expansion, competitive pricing with a range of value-for-money products and cost efficiency effort, making them key beneficiaries from other retailers.

Maintain NEUTRAL on Consumer Sector.

We maintain a NEUTRAL rating while remain cautiously optimistic on consumer sector in 2024. Despite domestic demand being supported by an improved employment rate and a revival in tourism activities, we remain cautious about potential downside risks. This include the impact of the SRI implementation, a higher SST rate, and rising food inflation, which could curtail consumer spending power especially on big ticket items. Additionally, margins could be under pressure in the near term due to unfavourable USDMYR currency exchange and higher prices in some commodities. Our top pick for this sector are MSM (TP: RM3.18) and MRDIY (TP: RM2.30).

Source: BIMB Securities Research - 7 Mar 2024