Consumer sector: Wavering, but still a defensive stock

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A DIP IN SPENDING: Processed chickens are sold at an average price between RM9 and RM10 per kilogramme at Stutong Market here. While the easing of food and commodity prices will benefit food and beverage players in general, private spending growth is expected to slow down in the first quarter of next year. — Bernama photo

KUCHING: While the easing of food and commodity prices will benefit food and beverage players in general, private spending growth is expected to slow down in the first quarter of next year.

Such a contradictory outlook is triggered by the fear of rising inflation and uncertainties in the economic climate.

“We expect the consumption growth to slow down to 6.9 per cent year-on-year for 2012 against the estimated seven per cent for 2011. The ease in the growth is likely to be driven by the accelerating consumer price index (CPI), even as market conditions remain volatile,” observed Kenanga Investment Bank Bhd’s (Kenanga Investment) economist Hamdan Mohd Yusoff in an e-mail response to The Borneo Post.

Kenanga Investment’s macro-economic forecast had put an average year-on-year CPI level at 2.9 per cent for next year against this year’s estimated 3.2 per cent.

“Thus, we are neutrally positive on the outlook for retail players such as Parkson Holdings Bhd, while maintaining a bullish take on bodycare and household products manufacturer such as Eng Kah Corporation Bhd.”

Explaining further, Hamdan said while global food prices would still have more potential for upside next year, local food inflation should moderate going forward as he believed subsidy cuts would be mild from now until the upcoming National General Election, most likely to be held in the first quarter of next year.

Nevertheless, Hamdan believed that on an overall basis, the sector should continue to stand out as a favourite of investors for next year’s first quarter, given its still-defensive nature against the current uncertain economic climate.

“We forecast that inflation will still be able to ease to 2.9 per cent in 2012 from an estimated 3.2 per cent in 2011, despite the rise in global oil and food prices.

“Again, this is primarily due to a high-base effect. Adding further, it is also because our economy is quite insulated, thanks to our fuel subsidies. Our expectations for the ringgit to appreciate throughout the year will also help to reduce imported inflation from tainting our CPI,” the economist outlined.

Moreover, large multinationals such as Nestle Malaysia Bhd could benefit from easing raw material prices; and eventually improve its margins as a result, according to Hamdan.

Nevertheless, he was cautious on certain raw materials, especially sugar.

“We anticipate sugar prices to continue being volatile despite it having softened since August 2011 due mainly to the shortage of supply coming from major sugar processing countries including Australia, Thailand and Brazil, which were hit badly by natural disasters.

“In any case, we believe rising sugar prices will hit Fraser and Neave Holdings Bhd and Cocoaland Holdings Bhd and Three-A Resources Bhd due to their relatively high exposure to sugar.”

On the other hand, Dutch Lady Milk Industries Bhd (Dutch Lady Malaysia) could be spared from the high-sugar-price risk. Recently, the milk and milk products manufacturer launched a two-year ‘Sugar Campaign’, targetting at reducing the local annual consumption of added sugar by 40 per cent from its current level.

“We remain positive that Dutch Lady Malaysia will maintain a healthy growth rate for 2012, and have chosen it as one of our top picks not only for the consumer sector, but for our overall industrial picks for the first quarter of 2012,” Hamdan underscored.

Noteworthy also, the economist said the ongoing potential privatisations of KFC Holdings Bhd (KFC) and QSR Brands Bhd (QSR) could likely bring in more favourable news to the consumer sector. To note, Johor Corp – which owns stakes in KFC and QSR – made a recent bid to privatise the two fast-food companies.

Industrial sources had disclosed that Federal Land Development Authority (Felda) might be bidding to acquire both KFC and QSR, with chairman Tan Sri Mohd Isa Abdul Samad had earlier stating that Felda would be fully capable in managing these large entities.

“The ongoing potential privatisations of KFC and QSR are likely to spur more interests in consumer stocks ahead, especially those which are seen as resilient and with high growth potentials,” Hamdan highlighted.