The results of the consumer product sector for 2Q23 reveled earnings normalised from the exceptional 2Q22 base whilst margins slipped on the back of rising operating costs.
Notwithstanding the more undemanding sector valuation following the lacklustre YTD share price performance, RHB Investment Bank keeps their sector call for now pending the Budget 2024 announcement (13 Oct) for more clarity on potential regulatory changes, if any.
2Q23 sector results were within expectations
Generally, RHB saw YoY weakness in sales for the consumer discretionary players – not surprising given the high 2Q22 base boosted by the broad economy reopening and special EPF withdrawal.
On the other hand, sales growth for consumer staple companies continued to hold up, notwithstanding the inflationary pressures and cautious consumer sentiment. Overall, they saw profitability dented by rising operating costs stemming from higher wages and electricity expenses.
On top of that, the softer consumer spending has also led to lower operating leverage and higher marketing expenses. During the quarter, they upgraded QL Resources and Berjaya Food to BUY.
Outlook
Considering the lack of festivities, RHB expects 3Q23 to see QoQ weakness and similar YoY trends as 2Q23.
In view of the subdued consumer sentiment on the back of elevated inflationary pressures, RHB foresees more promotional activities and marketing engagements to be initiated in order to spur consumer spending. On the flipside, input cost pressures may recede going forward, given the more stable trends of commodity prices and FX, on top of the fall in freight rates.
Hence, they could see an improving GPM going forward into 2H23, particularly for food manufacturers.
Overall, they believe consumer spending will remain resilient, notwithstanding the aforementioned challenges – supported by healthy economic growth and stable employment market.
RHB cited their Top Picks include Mr DIY given the visible growth trajectory driven by cost tailwinds and sticky demand and favour DXN for its attractive valuation and solid growth prospects underpinned by new market expansion and insulation from the rising costs.
Heineken is their preferred brewery pick considering the relatively cheaper valuation and market leadership in Malaysia.
Lastly, RHB highlighted Guan Chong as the bank believes its forward-selling mechanism, coupled with strong sales channel and multi-national corporation clientele, should continue to support its solid earnings base.
Risks to the recommendations include unfavourable regulatory changes such as drastic subsidy rationalisation and the reintroduction of the Goods and Services Tax or GST as well as a major slowdown in global economy. RHB Maintains a NEUTRAL call on the sector.
