PRIME POSITION: Photo shows aisles at a local supermarket. The consumer sector, a safe haven for investors in uncertain times, is in a prime position to see potential M&As ahead.
The consumer sector, long known as a safe haven for investors in uncertain times with its low equity beta, solid performance and decent dividend yield, is in a prime position to be a hotbed of regional mergers and acquisitions (M&As) moving forward as the Asean region is coming into its own with steady growth despite economic gloom in other parts of the world.
OSK Research Sdn Bhd (OSK Research) noted that the softening economy might affect consumer sentiment but believed that Malaysia’s low unemployment and rising household income would continue prop up consumer spending.
It remained bullish on the food and beverage (F&B) sector, as the demand was stable and F&B expenditure comprised the largest portion of consumers’ monthly household spending.
“Malaysia’s stable economic growth since the 1990s has lifted a large number of the population out of poverty, which buoyed the demand for consumer staples.
“The mean monthly household income grew by 9.2 per cent between 2007 and 2009, translating into an annual growth rate of 4.5 per cent, an indication of growing purchasing power and higher disposable incomes.
“In view of the nation’s higher mean monthly household income, growing middle class and steadily rising population, we see the consumer sector scaling new heights in the future,” the research house opined.
Source: OSK Research
Emerging markets ripe for M&As
Elaborating on the M&A front, OSK Research analyst Gan Jian Bo stated, “In recent years, consumer companies in the emerging markets have been consolidating to strengthen their presence and improve operating efficiencies.
“Of late, the cash-rich companies from the developed world are on the lookout for opportunities to venture into new markets, especially in the emerging countries.
“We believe there will be more consolidation or M&A moves in the consumer sector, which may in turn spur a re-rating of the sector.”
With reference to recent transactions, he noted that the F&B sector tends to command a richer valuation of 15 to 25 times compared with the retail sector’s nine to 15 times.
He added that many consumer players were facing diminishing organic growth in their home markets and to ensure their long-term survival, they would need to either continue to implement more cost saving initiatives and come up with new products locally to ensure stable earnings, venture into newer and potentially riskier high-growth markets for long term growth, or consolidate.
The consumer sectors in the emerging markets had been consolidating in recent years in search of economies of scale and better supply chain management, while the bigger players had been vying for opportunities to get a foothold in the high growth markets.
As an example, he pointed out, “Most of the Japanese companies involved in M&As were leveraging on the stronger yen to venture into high growth markets over seas, primarily into China, India and Asean, while the US companies were trying to establish a platform in the UK as a bridgehead into the Europe region.
“Meanwhile, the big retailers also made moves to achieve greater scale by acquiring smaller or niche retailing companies.
“We believe the pick-up in M&As will give rise to opportunities for a re-rating of the consumer sector, with the recent transactions providing a pricing benchmark for consumer stocks,” the analyst opined.
Recently, Parkson Holdings Bhd (Parkson), via its 67.7 per cent owned subsidiary Parkson Retail Asia Ltd (PRA) and wholly-owned company Parkson Myanmar, inked a deal to form a joint venture company with the brand Parkson Department Store in Myanmar.
The joint venture company was expected to have a paid-up capital of US$3 million while the group’s capital contribution of US$2.1 million for the deal would be sourced from internally generated funds and was not expected to have any material impact on the group’s performance.
OSK Research stated that PRA had been looking to expand its business into the Asean region as part of its plans to become one of the region’s largest department store chains.
The research house continued to be positive on Parkson on the back of the group’s growth prospects and aggressive regional expansion; the move served a testament to the region’s potential for expansion.
Mean and annual growth rate of monthly household income, 1995 – 2009
Encouraging valuations for consumer stocks
From a valuation perspective, the F&B counters in Malaysia were trading at higher price earnings (PEs) than their regional counterparts.
After classifying the consumer counters into sub segments, the analyst found that F&B players in the developed regions enjoyed a higher PE valuation versus their peers in the Asean countries, showing that the Malaysian F&B sector was commanding the higher end of the PE band.
For the retail industry, the valuations of Malaysian retailers were slightly cheaper than their peers from the developed countries and were at a deep discount compared to Asean’s retail companies.
As such he opined, “There is a possibility of a re-rating for the local retail industry since it is trading at a lower PE.
“We think that investors are switching to defensive counters such as consumer stocks, especially amid the current market volatility.”