KUCHING: Malaysia’s retail sector remains challenged, while the outlook in the food and beverage (F&B) segment looks more positive, analysts observed.
According to Affin Hwang Investment Bank Bhd (Affin Hwang), the first quarter of 2017 (1Q17) saw earnings disappoints from six out of the ten companies under its coverage, while performance were in line for the rest.
Affin Hwang has nonetheless noted that gross domestic product (GDP) was an upside surprise with a 5.6 per cent year on year (y-o-y) growth while private consumption remained resilient, climbing higher to 6.6 per cent y-o-y.
“Perhaps one might wonder why the 1Q17 earnings did not reflect this positive news,” it said.
“Firstly, we need to understand the components of GDP and private consumption to know where the growth came from.”
Affin Hwang highlighted that GDP growth does not only come from private consumption, but also from the investment side which rose strongly by 12.9 per cent y-o-y in 1Q17, significantly higher than 4.9 per cent y-o-y in 4Q16.
The research firm has nevertheless noted that looking at the components of private consumption, F&B accounted for the largest portion at 21 per cent, followed by utilities (16 per cent) and transport (14 per cent). Therefore, within the consumer space, the research firm would assume the F&B sector should have benefited more.
Affin Hwang went on to note that beneficiaries of higher private consumption may not necessarily be listed companies on the stock exchange.
“For example, higher consumption is mainly driven by higher F&B spending, but the outlets that benefit from this may be smaller shops that are not listed,” the research firm said.
“Looking at our F&B stocks, Nestle (Malaysia) Bhd’s (Nestle) top and bottom line grew and was in line with our and consensus expectations as their products are mainly in the consumer staple space.
“MSM Malaysia Holdings Bhd (MSM) and QL Resources Bhd (QL) showed top line growth, but MSM disappointed on the bottom line due to high cost of sales, whereas QL’s net profit was slightly below expectations after discounting the gain on disposal of investment property.”
It added that another example would be the retail segment where listed stocks are not showing the benefits partly due to e-commerce platforms such as Lazada, FashionValet and Zalora.
Affin Hwang also highlighted that the consumer sector is highly fragmented and each segment has their own specific drivers, also some may be company specific.
For example, despite the recovery in overall retail sales, retail stocks under the research firm’s coverage such as Aeon Co (M) Bhd (Aeon) and Parkson Holdings Bhd (Parkson) did not do well.
“This is due to an industry wide trend, where in department stores are not doing well, and statistics show the shift from hypermarkets to smaller format stores.
“The illegal market is a specific problem faced by the tobacco and brewery industry,” Affin Hwang said.
The research firm added that consumer staples should have been doing well in this weak sentiment, but stocks in the consumer discretionary space such as Bonia Corporation Bhd (Bonia) are still challenged at the top line possibly due to less spending and partly due to many alternatives/competitors in this space.
All in, Affin Hwang maintained its sector at a ‘neutral’ call as the research firm expected 2017 to be a challenging year for the stocks under its coverage.
Affin Hwang opined that the F&B segment looks more positive as some raw material prices seem to be tapering down.
It also projected that illegal cigarettes remained key problems for tobacco players, but the second half of 2017 (2H17) should show margin expansion at British American Tobacco (Malaysia) Bhd (BAT) as cost savings may come into play from sourcing cigarettes regionally.
“For top line growth, sentiment will still take time to recover, while the bottom line will be constrained by increasing cost of sales and operating costs,” the research firm said.