PETALING JAYA: Food and beverage (F&B) players may experience a margin squeeze next year on the back of rising commodity prices, according to Affin Hwang Capital.
The research house expects commodity prices to go up after staying relatively depressed this year.
“The low prices of some key commodities have been a boon to the F&B players.
“The downtrend continued in the third quarter of 2018, recording lower average raw material prices (raw sugar, Robusta & Arabica coffee and generic whole milk) on a year-on-year and quarter-on-quarter basis.
“However, normalising supply and demand dynamics could pressure such commodity prices upwards,” it said in a report on the consumer sector yesterday.
The research house, however, said private spending should remain robust in 2019 on the back of encouraging macroeconomic indicators.
“However, we believe that this has mostly been priced in by the market. The robust spending should translate into strong demand for consumer staples.
“On the retail side, we believe that the increasing fragmentation of the market suggests competitive pressures for a number of the listed players, which have seen sales come under pressure despite positive indicators.”
In terms of downside risks to the consumer sector, Affin Hwang Capital said this could include a decline in consumer spending and a sharp rise in raw material prices.
“Upside risks include better-than-expected growth in consumer sentiment and a sharp decrease in the illicit trade of cigarettes.”
The research house chose QL Resources Bhd as its top stock pick for its defensiveness amidst growth potential.
“We continue to like QL Resources for exposure into the sector due to the defensive nature of its core businesses, while providing ample drivers for its next leg of growth through Family Mart.
“In the near term, we expect capacity expansion and better fish catch to buoy the marine product segment performance while normalising supply and demand dynamics in the poultry segment should provide a basis for further margin recovery.”
For investors looking for high dividend plays, Affin Hwang Capital noted that brewery stocks Heineken and Carlsberg offered yields of about 5% (based on its 2019 forecasts), adding that these companies displayed a solid earnings performance and balance sheets.
Affin Hwang Capital said the consumer sector’s aggregate core earnings increased by 8% year-on-year in the nine months of 2018, predominantly driven by the large caps such as Nestle, QL Resources and Carlsberg.
“Overall, with the exception of Nestle, QL Resources and the brewers, as well as British American Tobacco , the rest of the consumer sector stocks under our coverage reported third quarter 2018 earnings which were below our and consensus estimates.”