Review

Most companies reported no surprises as earnings of 10 out of 15 stocks under our coverage aligned with our projections. Conversely, 5 consumer counters exceeded our earnings estimates including Breweries (Carlsberg and Heineken), Food and Beverages (Able Global and F&N) and a Retailer (Aeon).

The positive variance is predominantly driven by heightened festive demand and the stabilised key raw material costs in 1QCY24. Breweries’ outperformance is attributed to robust demand preceding the price hike. Meanwhile, resilient festive volumes and favourable input costs (sugar, skim milk powder, whole milk power, soybean meal, corn, etc.) have driven improvements for both retailer and F&B players. This quarter, none of the companies fell short of our earnings forecasts.

1QCY24 sector revenue grew by 3.9% QoQ and 8.3% YoY, with the Industrial and F&B segments leading. Scientex and Po Huat in the Industrial segment saw strong topline growth this quarter, due to a gradual recovery in demand. Meanwhile, F&B segment benefited from the Chinese New Year festivities and early-Ramadan sales. Notably, the brewery segment experienced a 15.7% QoQ increase, primarily due to rush trade purchases ahead of the price adjustment effective from 1 April 204.

Earnings for 1QCY24 surged by 24.8% YoY, primarily propelled by the substantial contributions of F&B entities (+32.4% YoY) and Retailer (+26.0% YoY). The robust earnings growth can be ascribed to enhanced margins, which escalated to 7.4% (+1.3%-pts YoY) for the F&B segment and 6.7% (+1.0%-pts YoY) for the Retail segment. The YoY margin improvement was chiefly bolstered by the alleviation of raw material costs compared to 1QCY23 when input costs were significantly elevated. Nonetheless, 1QCY24 exhibited diminished QoQ performance, likely due to the high base effect from 4QCY23.

Outlook

We Are Upbeat About the Sector Outlook for Several Reasons:

i) Flexible withdrawal of EPF account 3, ii) Salary hikes greater than 13% for civil servants, iii) Robust tourist arrivals and iv) Increase in out-of-home consumptions. With the abovementioned factors, we are positive about the consumer sector outlook in FY24 as consumer spendings is expected to increase with rising disposable income. Additionally, robust tourist arrivals will boost retail footfalls, leading to improvements in companies’ top lines. However, there are some downside risks to the sector, including i) uncertainty regarding the structure of subsidy rationalisation and ii) the weakening MYR/USD exchange rate, which could potentially erode disposable income.

Recommendation

Upgrade Consumer sector to Overweight from Neutral. We anticipate that the flexible withdrawal of EPF account 3, an increase in out-of-home consumption and salary increments of civil servants will boost consumer spending. Consequently, robust tourist arrivals would benefit the retail and breweries segment as well. In this reporting season, we downgraded Amway (TP:RM7.70) to Sell due to the limited potential upside as we believe the share price has already priced in positive news.

Our top pick for the sector is Aeon (TP:RM1.68). We favour Aeon due to its resilient growth in the property and management segment, as well as improving foot traffic and occupancy rates.

Source: TA Research - 5 Jun 2024