Consumer sector
Maintain overweight: Although we expect the tepid economic scenario in 2012 to dampen earnings, we believe consumer companies will fare better than average, mainly due to the firm demand for their products and the fact that these companies have taken the appropriate measures and learned from the last crisis in 2008/09.
During the last crisis, most consumer companies’ top and bottom lines still registered double-digit growth, fuelled mainly by promotions that spurred consumer spending and internal cost saving. Despite the heavy discounting and promotions and new opening expenses, most retail companies reported better if not flat margins from FY08 to FY10.
The same applies to food and beverage (F&B) companies, although food commodity prices spiralled upwards only after the crisis.
We expect consumer spending to remain relatively stable as disposable income increases with the country’s low unemployment of 3%. Strong retail sales amid an environment of weak consumer sentiment during the last crisis showed that retail sales are not necessarily affected by consumer sentiment, as long as unemployment remains low. Although Malaysia’s household debt-to-GDP ratio is relatively high at 76%, the overall household balance sheet remains sound.
Given that food and beverage demand is expected to be firm and sales resilient, the financial performance of F&B companies will depend mainly on the fluctuations in food commodity prices and their ability to keep manufacturing costs low.
As economic conditions deteriorate, we expect prices to decline further, although they are unlikely to go back to their previous lows. In the event food commodity prices stay high, F&B companies would not be substantially affected given their ability to cope with the high raw material costs post the 2008/09 crisis, as well as a stronger US dollar against the ringgit.
Given our view that the share market should weaken in the near term due to global economic headwinds, the consumer sector — known for its resilient earnings, low beta and decent dividend yields — will be among the safer bets. Hence, we maintain overweight on the consumer sector.
QL Resources Bhd (“buy”, fair value: RM3.62) is our favourite stock for its uninterrupted earnings growth in the past 20 years and rising operating profit margins since 2004. We also like Padini Holdings Bhd’s (“buy”, FV: RM1.42) attractive valuation and good dividend yield. — OSK Research, Dec 27
Maintain overweight: Although we expect the tepid economic scenario in 2012 to dampen earnings, we believe consumer companies will fare better than average, mainly due to the firm demand for their products and the fact that these companies have taken the appropriate measures and learned from the last crisis in 2008/09.
During the last crisis, most consumer companies’ top and bottom lines still registered double-digit growth, fuelled mainly by promotions that spurred consumer spending and internal cost saving. Despite the heavy discounting and promotions and new opening expenses, most retail companies reported better if not flat margins from FY08 to FY10.
The same applies to food and beverage (F&B) companies, although food commodity prices spiralled upwards only after the crisis.
We expect consumer spending to remain relatively stable as disposable income increases with the country’s low unemployment of 3%. Strong retail sales amid an environment of weak consumer sentiment during the last crisis showed that retail sales are not necessarily affected by consumer sentiment, as long as unemployment remains low. Although Malaysia’s household debt-to-GDP ratio is relatively high at 76%, the overall household balance sheet remains sound.
Given that food and beverage demand is expected to be firm and sales resilient, the financial performance of F&B companies will depend mainly on the fluctuations in food commodity prices and their ability to keep manufacturing costs low.
As economic conditions deteriorate, we expect prices to decline further, although they are unlikely to go back to their previous lows. In the event food commodity prices stay high, F&B companies would not be substantially affected given their ability to cope with the high raw material costs post the 2008/09 crisis, as well as a stronger US dollar against the ringgit.
Given our view that the share market should weaken in the near term due to global economic headwinds, the consumer sector — known for its resilient earnings, low beta and decent dividend yields — will be among the safer bets. Hence, we maintain overweight on the consumer sector.
QL Resources Bhd (“buy”, fair value: RM3.62) is our favourite stock for its uninterrupted earnings growth in the past 20 years and rising operating profit margins since 2004. We also like Padini Holdings Bhd’s (“buy”, FV: RM1.42) attractive valuation and good dividend yield. — OSK Research, Dec 27
