Strong following for consumer stocks

AMID the volatility of the market, consumer stocks have been attracting investor interest. Consumer discretionary stocks are normally a defensive sector, as seen from the gains on the FTSE Bursa Malaysia Consumer Stock Index.

The consumer sector exhibited its defensive nature, with a 3.07% gain year-to-date with the attractiveness of its dividend yields and steady corporate results. Investors believe consumer counters are going to benefit from low commodity prices. The index hit its 52-week high of 616.10 on July 19, 2016.

Consumer counters like Nestle (M) Bhd, Fraser & Neave Holdings Bhd (F&N), Panasonic Manufacturing (M) Bhd, Dutch Lady Milk Industries Bhd and Padini Holdings Bhd have recorded gains from 7.9% to 58% year-to-date. In contrast, the FBM KLCI has so far fallen by 2.01%.

Analysts say consumer counters, which pay generous dividends, will continue to attract a strong following as they expect retail sales to recover gradually towards year-end.

“The demand for consumer staples is always there. There is still lingering overhang on consumer spending from the implementation of the goods and services tax (GST). We believe retail sales will recover gradually towards the year-end,” an analyst says.

Analysts do not expect a sharp rise in purchasing power, as global uncertainties are likely to remain.

Nestle, F&N and Dutch Lady have attracted interest as investors believe these firms may benefit from low commodity prices, thus pushing up their upcoming results on margin expansion.

Year-to-date, Panasonic Manufacturing has gained a whopping 57.74%, hitting its 52-week high of RM39.92 on July 29.

F&N reported a 12.8% growth in net profit to RM93.56mil in the third quarter ended June 30, while revenue was up 1.8% to RM1.1bil. Earnings per share increased to 25.5 sen from 22.7 sen. The beverage maker hit an all-time high of RM26.34 early this week.

In the past one month, Dutch Lady shares have gained more than 6.6%, rising to their all-time high of RM64 yesterday.

AllianceDBS Research expects consumer spending to recover in the coming quarters, supported by the government stimulus announced in January such as the 3% cut in employees’ contribution to the Employees Provident Fund, hike in the minimum wage in July and the ringgit’s stabilisation.

Nonetheless, the research house believes that the recovery will be gradual.

“As a whole, we anticipate that the earnings outlook for the sector will remain cloudy since the expected gradual improvement in consumer spending in the coming quarters could support the top-line growth of industry players. However, cost pressures and potential labour shortage issues could adversely impact earnings prospects.

“As such, we favour stocks with resilient business models, established brand names in their respective sectors to withstand the continued challenging operating environment, strong balance sheets to undertake earnings-accretive merger and acquisition activities to drive growth and/or engage in capital management exercises to reward shareholders, regional exposure to mitigate (potential) domestic earnings risks, and attractive value propositions,” AllianceDBS says, adding that OldTown Bhd is its preferred pick for the consumer sector.

Retail Group Malaysia (RGM), which tabulates quarterly retail data, says the Malaysian retail industry recorded a 4.4% fall in sales in the first quarter of this year compared with a 4.6% growth a year ago.

The report, which is based on interviews with members of the Malaysia Retailers Association on their retail sales performances, attributed the poor first-quarter performance to higher pre-GST sales a year ago, as well as the weak Chinese New Year sales in February.

RGM says the estimated growth rates for the third and fourth quarters of 2016 are 5% and 5.5%, with poor consumer spending expected to be the biggest challenging factor for 2016.

It notes that prices of retail goods and services have been increasing gradually since the beginning of this year, partly due to our weak Malaysian currency. This had further deteriorated the spending power of Malaysian consumers during the first quarter of this year.

During the latest quarter, the Consumer Sentiment Index (by the Malaysian Institute of Economic Research) climbed to 72.9. However, it was still below the threshold level of confidence. Malaysian consumers are still concerned about the rising cost of living and future job prospects.

Meanwhile, AmInvestment Bank reiterates its “neutral” stance on the consumer sector. Given the present market uncertainties, it prefers companies with a defensive earnings profile, stable growth and attractive yields. Hence, it has an “overweight” stance on the malt liquor market.

While the tobacco industry, namely British American Tobacco (M) Bhd, is also known for such qualities, AmInvestment remains cognisant of the tough operating environment brought about by heightened regulations (excise tax hikes), which have affected volumes. As such, it has a “neutral” call on the tobacco sub-sector.

“We are ‘neutral’ on the retail sub-segment, given the lack of positive catalysts. The outlook remains challenging, underpinned by soft consumer confidence and business sentiments.

“Padini Holdings is our only ‘buy’ due to its more resilient earnings profile, strong brand value and attractive yields,” it says.