WHILE consumer companies have already raised their selling prices in 1H 2022 to pass on the higher commodity prices, they may have no better choice than to further raise their selling prices if input costs – especially that of sugar – continues to rise.
In CGS-CIMB Research’s view, this should not be an issue as the companies have the pricing power (albeit with a certain time lag) given that the long-term demand for consumer staples goods – essentially daily necessities – is generally inelastic.
“In a worst-case scenario, the lower export availability in the global sugar industry could lead to higher sugar prices,” projected analysts Walter Aw and Khoo Zhen Ye in a consumer section outlook with focus on food and beverages (F&B).
“This could lead to higher imported raw sugar prices for sugar refineries which in turn will pass on the additional hike in prices to industrial buyers in Malaysia.”
To recap, the retail selling price of coarse grain sugar in Malaysia is capped at RM2.85/kg and fine granulated sugar at RM2.95/kg.
However, the research house expects the impact of higher sugar prices on consumer companies to be minimal given sugar cost makes up less than 5%-20% of their total cost.
Yesterday (May 24), India announced plans to restrict sugar exports from June 1 onwards (the first time in six years) to prevent a further rise in domestic prices.
According to a media report, the country also plans to cap this season’s export (October 2021 to September 2022) at 10 million tonnes, with 7.1 million tonnes exported thus far this season.
India is the world’s biggest sugar producer and the second biggest exporter after Brazil.
Under its coverage, CGS-CIMB Research said Nestle (M) Bhd, Fraser & Neave Holdings Bhd (F&N), Power Root Bhd and Kawan Food Bhd have the biggest exposure to higher sugar prices given their business and product range.
“In addition, we believe that consumer companies under our coverage have likely forward hedged some of their raw sugar requirements (likely one to three months); this should help to mitigate any near-term volatility in sugar prices,” opined the research house.
For now, CGS-CIMB Research keeps its “overweight” call on the overall consumer sector in view of its better earnings prospects (pent-up demand from economic re-opening) and appealing valuations.
“Our top picks in the sector are Berjaya Food Bhd (defensive play), Bonia Corp Bhd (strong turnaround play) and Lee Swee Kiat Group Bhd (defensive demand and robust earnings profile),” projected the research house.
“Potential re-rating catalysts include stronger sales and lower input costs. Key downside risks: higher-than-expected rise in input costs, and a surge in COVID-19 cases affecting consumer sentiment.” – May 26, 2022
