KENANGA Investment Bank Berhad Research has maintained a “neutral” rating on the sector, saying over the immediate term, consumer spending wil be weighed down by elevated inflation, a higher Sales and Service Tax (SST), increased utility bills and impending fuel subsidy rationalisation.
However, the research house said on a brighter note, softening food commodity prices will ease margin pressure on consumer staple players although higher freight cost in the aftermath of the Red Sea conflict has reverberated throughout the sector.
“As consumers prioritise spending on essential items particularly food over apparel, appliances and furniture, we expect more resilient earnings from consumer staples players as compared with consumer discretionary names,” Kenanga said in a sector update on Friday (April 5).
Kenanga’s top sector picks are F&N (OP; TP: RM33.80) and MRDIY (OP; TP: RM1.95).
Cautious consumer spending
Kenanga also projects private consumption to grow at 5.8% in CY24 vs 4.7% in CY23, which is in the same vein with the retail sales growth projection by Retail Group Malaysia (RGM) of 4% in CY24, vs 2.2% in CY23.
“We are mindful that the higher growth could be driven by higher prices rather than sales volumes,” the research house said.
“We believe cautious consumer spending will persist throughout CY24 and may even extend into the early months of CY25 on the back of escalating cost of living due to sustained high inflation, subsidy cuts for essential items such as chicken and rice, along with hikes in water and electricity tariffs, not to mention the increase in SST from 6% to 8%, which now encompasses a broader range of services including maintenance and repair work.
“These changes are likely to elevate manufacturing costs for businesses, potentially leading to a reassessment of product pricing across various industries.”
Kenanga believes the biggest blow has yet to come, i.e. fuel subsidy rationalisation.
It said that while the impact on high-income earners might be minimal, the middle-income group is expected to experience the most significant financial strain as at least some of them will no longer enjoy subsidised fuel.
“Ironically, the lower-income group might find themselves somewhat shielded from these economic pressures, thanks to ongoing government cash handouts and the continuation of subsidies, especially fuel subsidies,” the research house added.
Balancing act for consumer staples margins
Meanwhile, consumer staples companies are poised to benefit from the recent decline in prices for certain soft commodities, which is expected to facilitate a recovery in margins.
Notably, prices for key commodities such as wheat, corn, soybean, and aluminium have been decreasing in recent months, with wheat, corn and soybean prices dropping over 6% in 1QCY24.
Conversely, the prices for cocoa and cotton have been on an upward trajectory, with cocoa prices soaring by 133% in 1QCY24 due to reduced supplies from West Africa, exacerbated by adverse weather conditions and strong demand.
Cotton prices, meanwhile, have also risen by 13% in 1QCY24, attributed to decreased planting areas and low stock levels in major production countries. Furthermore, the Shanghai shipping index has witnessed a nearly 33% increase in 1QCY24, primarily due to ongoing conflicts in the Red Sea region.
“Given these dynamics, companies like NESTLE (UP, TP: RM115.00) and PADINI (UP, TP: RM3.20) may face margin pressures in the upcoming quarters due to the rising costs of cocoa and cotton,” Kenanga reckoned.
“Additionally, the increase in the Shanghai Shipping Index suggests that shipping costs for PADINI and MRDIY are likely to escalate, especially since a large portion of their products are sourced from China.” – April 5, 2024
Main pic credit: The Star
