PETALING JAYA: Prices of some consumer products could likely rise next year although not too drastic upon the expiry of the price guidelines of the Price Control and Anti-Profiteering Act 2011 by the end of this month.
Affin Hwang Capital, which is maintaining a “neutral” stance on the consumer sector, said it believed there would be price increases upon the expiry of the guidelines but are unlikely to be too drastic as some of the companies under its coverage had already increased prices throughout this year.
“Following the expiry, companies can increase prices of their products more flexibly, however, it may be at the expense of sales volume in an environment of weak sentiment as seen through companies such as British American Tobacco (M) Bhd (BAT), where a price increase has led to a large volume decline.
“We understand that companies are still allowed some price increases with justifications to maintain margins and pass on higher cost of goods and operating costs. For BAT, assuming a 1% increase in average selling price (ASP) with other variables kept constant, we estimate BAT’s financial year (FY) 2017-2018 net profit would increase by 2.7-2.8% year-on-year (y-o-y).
“For MSM Malaysia Holdings Bhd, assuming a 1% increase in the sugar ASP for the domestic segment, we believe MSM’s FY17-18 net profit would increase by about 4.1-4.4% y-o-y,” the research house noted.
To recap, the Price Control and Anti-Profiteering Act 2011 has regulations that stipulate retailers and traders cannot increase their net profit margins for goods and services between January 2015 and June 2016 in response to the goods and service tax (GST) implementation. Recall that this has been extended for six months until Dec 31, 2016.
While there is no word of a further extension in the anti-profiteering act, Affin Hwang said it does not discount the possibility of an extension or a replacement with a new mechanism, as the period is shorter in comparison to the transitional period adopted by other countries such as Australia, where the Australian Competition and Consumer Commission established the price oversight regime and enforced it for three years to ensure that there would be no price exploitation following GST implementation.
Channel checks showed that the Domestic Trade, Cooperatives and Consumerism Ministry had previously informally indicated an intention to continue with the anti-profiteering act but with an altered mechanism, the brokerage added. “We gather that some retailers want the anti-profiteering provisions to be abolished,’’ it noted.
Affin Hwang said it is maintaining its “neutral” call on the sector as it expected 2017 to be a challenging year for the stocks under its coverage.
“While the MIER consumer sentiment index has slightly recovered from its all-time low of 63.8 in the fourth quarter of 2015 to 73.6 in the third quarter of 2016, it is still below the 100 points threshold, and companies will also likely be hit by increasing cost of sales and operating costs.
“We advise investors who seek exposure to consumer stocks to focus on companies with defensive characteristics and attractive dividend yields, with Heineken Malaysia Bhd as our top pick. We believe Heineken will continue to maintain its dominant position in the domestic malt liquor market because of its strong brand portfolio, corporate governance and solid brand name.”
Dividend yields for the stock is estimated to be at about 5% in the next two years, it said, adding that the key downside risks include increasing rivalry from competitors and contraband beers, lower-than-expected sales volume growth and higher-than-expected operating expenditures.