ANTICIPATED weakness in consumer spending and further margin pressure for consumer companies has prompted CGS-CIMB Research to downgrade Bursa Malaysia’s consumer sector to “neutral” (from “overweight” previously).
The research house further expects the weak macroeconomic outlook (spike in inflation, interest rate hikes and cuts in subsidies) to erode consumer spending ability, resulting in slower demand for consumer goods, mainly discretionary items.
“In addition to margin compression and rising cost pressures, we expect consumer names to face a more subdued operating environment,” opined analyst Walter Aw in a consumer sector update.
“In 2H 2022F, we expect consumer companies to see margin pressure (2-3 percentage points) from higher operating expenses (labour and utilities among others), weaker ringgit and higher input costs.”
While most consumer companies under its radar can raise product prices to offset higher input costs, CGS-CIMB Research said there is limited room for this as further hikes in selling prices could come at the expense of sales volumes.
“Hence, we expect consumer companies to absorb some of the higher costs in a bid to support sales volume, resulting in margin compression,” projected the research house. “Amid an erosion in spending power, consumers are likely to prioritise spending on daily necessities while the demand for discretionary goods should weaken.”
In 2H 2022, the research house expects consumer spending to normalise from a high base in 1H 2022.
“Note that strong sales enjoyed by consumer names (mainly discretionary ones) were driven by pent-up demand and ‘revenge spending’ following the easing of lockdown measures and festive celebrations, and not subject to COVID-19 restrictions (unlike previous two years),” noted CGS-CIMB Research.
Despite the uncertainties, the research house foresees pockets of opportunity in the consumer sector. It likes QL Resources Bhd, Farm Fresh Bhd and Kawan Food Bhd as it believes the demand for their items is inelastic and will be boosted by higher in-home food consumption.
“In the discretionary space, we like Mr DIY Group (M) Bhd as a key beneficiary of consumer down-trading given its market position as a ‘value retailer’,” suggested CGS-CIMB Research.
“We downgrade three discretionary stocks (7-Eleven Malaysia Holdings Bhd, Berjaya Food Bhd and DKSH Holdings (M) Bhd) to “hold” (from “buy” previously) as we expect these companies to be hurt by weak consumer spending.” – July 7, 2022
