KUCHING: The local retail scene is expected to improve in the first half of the financial year 2018 (1HFY18), analysts say.
However, they pointed out that the local retail market remains challenging as consumer purchasing power weakens and foreign competition intensifies in Malaysia.
The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) highlighted this in a recent report.
It said, “The local retail market remains challenging as consumer purchasing power will continue to fall whilst retail players are facing ever increasing competition as new local and foreign retailers are flooding into the local market.
“In the near term, retail sales will grow driven heavily by promotion and price discounting as consumer will look for value for money purchase as choices are ample. Hence, this creates unconducive scenario to raise selling prices.”
Nevertheless, it expected a recovery next year. It opined, “We expect that the recovery in the local retailing segment will improve starting from the 1HFY18 as the multiplier effect of better GDP number translated into better consumer spending power.”
In the meantime, the research team suggested that local retailers need to expand to seek untapped markets to sustain earnings.
Meanwhile, on the performance of the retail sector in the second quarter of FY17 (2QFY17), MIDF Research noted that the performance of retailer stocks under its coverage came within its expectation.
“Retailers under our coverage recorded results within expectation from the recently concluded earnings season as the 2Q is seasonally a strong quarter for retailers due to the effect from Hari Raya spending,” it explained.
However, it pointed out that departmental store cum supermarket and department store sub-sectors recovered from poor 1Q.
It noted that as per the data compiled by the Retail Group Malaysia (RGM), both departmental store cum supermarket and department store sub-sectors showed a recovery from the poor performance last quarter with a year-on-year growth of 4.1 per cent year-on-year (y-o-y) and 15.1 per cent y-o-y respectively.
“This corroborated with Aeon Co (Malaysia) Bhd (Aeon Co) and Parkson’s y-o-y revenue growth of 2.3 per cent y-o-y and 21.30 per cent y-o-y respectively,” it added.
In the coming quarter, it noted that RGM forecasted departmental cum supermarket and department store sub-sectors to decline 2.5 and 1.5 per cent y-o-y.
“We concur with this view as the growth of both subsectors will normally return to the red in the 3Q in line with the historical trend,” it said.
On individual stocks, MIDF Research remained confident that Aeon Co would not lose its appeal despite challenges in the departmental store sub-segment.
It explained, “As reported from in the Total Retail 2017 report by PWC, the household appliance, furniture and homeware, clothing and footwear are among the product categories that consumers prefer to buy in-store rather than online as shoppers still like to touch and feel and try on things before buying.
“Nevertheless, there is a need for retailers to invest in an inviting, appealing in-store environment at a suitable store locations, which Aeon is currently focusing on.”
Going forward, it highlighted that newly opened Aeon Mall Bandar Dato’ Onn in Kempas, Johor which was launched earlier this month as well as Aeon Mall Kuching which is expected to be launched next year are expected to contribute positively to earnings.
“We are positive on this move despite the continuing challenge facing departmental store sub-sector and proliferating shopping malls as Aeon Co’s possesses a unique business model.
“Being a player in both businesses, Aeon Co is in position to improve its store’s performance by making its shopping malls a preferred choice within a catchment area,” it opined.
Aside from that, it noted that Padini Holdings Bhd (Padini) is looking to expand its footprint regionally.
“Despite the growth in revenue of 32 per cent y-o-y in the recent quarter which is in line with the sub-sector growth, Padini’s net profit margin contracted approximately 2.1 percentage points y-o-y.
“The top line growth is mainly attributable to the opening of 14 new stores during the current 12-month period.
“Nevertheless, margins contracts due the pressures of rising input costs as well as selling and distribution expense while retail price need to be retained due to the stiff competition locally. Due to this, Padini is looking to expand its footprint in Cambodia in order to find new market to penetrate. It plans to open two to four stores in the next 12 months with investment of up to RM20 million in Cambodia,” it said.
All in, MIDF Research said it is positive on this development as it would provide a new area of growth for Padini amidst the increasing purchasing power of Indo-China region.
The research team maintained an overall ‘neutral’ rating on Malaysia’s retail sector.