DESPITE the cheer over the prospect of economic re-opening, Hong Leong Investment Bank (HLIB) Research is cognisant on the possible re-introduction of restrictions to curb the more transmissible Omicron COVID-19 variant.
While it remains optimistic on recovery in consumption, the spectre of elevated commodities and freight costs still lingers, capable of undermining margins.
In this regard, concerns abound that prolonged volatility of commodity prices would prompt staples and food & beverage (F&B) companies to increase prices across different segments of products.
“Given the challenging economic environment and frail consumer sentiment, we expect demand to be affected as price sensitivity might motivate consumers to reduce consumption or switch to more affordable options,” opined analysts Syifaa’ Mahsuri Ismail and Sophie Chua Siu Li in a sector update.
“Thus, we expect patchy recoveries in our consumer universe with risk of margin compression for staples.”
In tandem with the strong resumption of global consumer activities, prices of commodities have continued with their steep climb: robusta (coffee beans) (+74% year-to-date [YTD]); palm oil (+35% YTD) and skim milk (+29% YTD).
“Additionally, with the continuous supply chain disruption, we opine that prices will stay elevated for the foreseeable future,” noted HLIB Research.
“We gather that despite the initiatives on internal savings and hedging policy, the prolonged volatility of commodity prices may prompt staples and F&B companies to increase prices across different segment of products.”
Given the challenging economic environment and frail consumer sentiment, the research house expects demand to be affected as price sensitivity might motivate consumers to reduce consumption or switch to more affordable options.
Against such backdrop, the research house reiterated its “neutral” stance on the consumer sector as “we expect varying degrees of recoveries across our coverage”.
Its top picks are tilted towards retail stalwarts namely, Mr DIY Group (M) Bhd and Focus Point Holdings Bhd.
Retaining its “buy” rating on Mr DIY with a target price of RM 4.51, HLIB Research expects steady store expansion and omni-channel strategy (online, Touch ‘n Go collaboration) to shore up the company’s profitability in line with the clearer recovery picture.
As for Focus Point (“buy”; target price: RM1.03), the research house is confident of the company’s scalable business model as it reckons that both the optical and F&B segments are able to ramp up fully once operating conditions normalises. – Dec 22, 2021
