KUCHING: The consumer sector is rife with activity as food and beverage (F&B) players continue to experience solid demand for perishable products while the retail sector is expected to see a tough year ahead for its players.
Ngo Siew Teng, an analyst with RHB Research Institute Sdn Bhd (RHB Research) in her report on the sector yesterday outlined that F&B was still one of the major components in household expenditure, making up more than 20 per cent of overall expenses.
“While the lower-income groups might switch to cheaper alternatives, we believe this would have a minimal impact on the companies (under our coverage) as their products are generally affordable and widely accepted,” Ngo explained.
For example, Nestle (Malaysia) Bhd (Nestle), which owns well-established and trusted brands such as Nescafe, Milo and Maggi, manufactures a wide range of products targeting the low to high-end consumer segments.
“QL Resources Bhd (QL Resources), which is involved in integrated livestock farming, marine products and oil palm, produces broilers, eggs and surimi-based products that are generally basic necessities,” the analyst gave as another example.
F&B players, she said, all generally registered healthy topline growth which reaffirmed RHB Research’s view that demand for food products remained firm regardless of economic conditions.
“Food commodity prices remain high compared with 2000 to 2006 levels, but have retraced from their previous peaks and stabilised. Profit before tax margins for the counters under our coverage such as Nestle, QL Resources, Oldtown Bhd and Johore Tin Bhd are holding up well, as well as have ample room for growth on the back of cheaper raw material costs.”
Looking specifically at QL Resources, Ngo said the group’s turnover and margin held up well despite steeper corn and soybean prices last year, as the group is mainly involved in the feed raw material trade.
“This helped transfer the cost to other smaller poultry players, thus preserving better margins for its own poultry operation,” she explained. “In contrast, its peers such as Farm’s Best Bhd and LTKM Bhd saw their margins contract severely due to volatile commodity prices.
“Although the recent H7N9 bird flu situation in China might hamper the overall consumption of broilers, we see this negligibly impacting QL Resources as consumers tend to switch from broiler meat to alternative protein sources such as eggs and surimi-based products.”
Meanwhile, Ngo painted a neutral picture for the retail sector as it showed signs of weaknesses evidenced by a set of uninspiring numbers seen in department store operators as well as other retailers over the past few quarters.
“In light of the global uncertainties and high household debt, we expect consumers, especially the low- to mid-income earners, to rein in their spending on non-necessities.
“Malaysian consumer spending is showing early signs of a slowdown. Retail sales in the ‘golden quarter’ – typically the last quarter of the year (4Q) – were actually lower than in 3Q. As such, we are neutral on large-cap retail counters such as Amway Bhd, AEON Co (M) Bhd and Parkson Holdings Bhd, which have higher relative valuations among the consumer stocks.”