PETALING JAYA: A promising outlook has been projected for the local consumer sector for this year, spurred by higher disposable income that will be driven by Budget 2020 initiatives, major sporting events and spillover from Visit Malaysia Year 2020 (VMY2020).
TA Securities, in a report, said salient measures announced at Budget 2020 were largely positive to the consumer sector.
“Consumer disposable income for the less privileged population is likely to improve, underpinned by the Bantuan Sara Hidup Rakyat with extended coverage, lower tax rate for small and medium-sized enterprises, one-time digital stimulus, along with the increase in minimum wages which will alleviate higher cost in major cities.
“Moreover, job opportunities should become more vibrant with the implementation of the Malaysian@Work programme.”
Announced in Budget 2020, the programme will create 350,000 jobs.
To support VMY2020, TA Securities pointed out that the government has allocated RM1bil through the Tourism Infrastructure Fund (TIF) to fund infrastructure projects to development of tourism industry.
“The authority targets to increase the number of tourist arrival to 30 million alongside increase in tourism revenue to RM100bil. We believe brewers, retailers and dominant food and beverage (F&B) players would benefit from such campaign.
“This is because people tend to increase their alcohol consumption while travelling as a means of entertainment or networking, thus an influx of tourists could provide a boost to the demand for alcohol.”
Kenanga Research, in a report, echoed TA Securities’ call that the TIF would be a boost for the local consumer sector.
“The fund is available to all tourism infrastructure projects such as projects that contribute to the development of the tourism industry and not just limited to hotel, convention centre, facilities related to education, medical or agro-tourism.
“Retailers could tap into the fund to build around their existing infrastructure to cater for tourism activities, which may increase footfalls into their stores and malls.”
TA Securities said although an increase in stores and malls’ footfalls driven by tourists is deemed positive for retailers, it does not expect multi-level marketing retailers to experience any direct benefit from the campaign.“The increase in travellers would be an earnings catalyst to dominant companies such as F&N and Nestle, which have products that have widespread cooking applications and could satisfy the increasing need for F&B.
“Shopping and F&B are among the top expenditures of a tourist, at 36% and 11% of total spending respectively.”
Separately, TA Securities said external factors are largely conspired towards supporting earnings growth of Brewers in 2020.
“In addition to VMY2020, brewers are expected to benefit from the Euro Cup that will take place in mid-2020, stable excise tax environment and reduction in contraband.”
While rising cost structure remains mild dampeners to the sub-sector, the research house said brewers could pass-through cost when deemed necessary, as the last price increase that happened in April 2019 did not affect legal consumption considerably.
“We opine that marketing expenses would be better optimised in 2020 following a major rebranding performed by Carlsberg in 2019 and Heineken’s efforts in rationalising its product portfolio.”
AmInvestment Bank Research said it anticipated the growth for consumer staples to be stable with sustained consumer spending and growing private consumption.
“On the other hand, consumer discretionary will be more susceptible to the weak consumer sentiment and challenged by the increased competition with substitutes becoming more readily available in the market, ” it said.
The research house added that it Power Root Bhd, GUAN CHONG BHD, Leong Hup International Bhd (LHI) and PADINI HOLDINGS BHD to be driven by its overseas expansion, which offers diversification in their earnings base.
“Power Root plans to boost its export sales in China and the Middle East and North Africa region. Guan Chong plans to construct a new cocoa bean grinding plant in Ivory Coast.
“LHI plans to expand its operations in Vietnam, the Philippines and Myanmar to tap into the growing markets while diversifying its earnings base. Padini’s expansion plan will be in its Cambodia’s operations although at a much less aggressive pace.”
AmInvestment Bank Research, which has an “overweight” call on the consumer sector, said it may downgrade its outlook to “neutral” should several significant factors occur. Among them is the sharp weakening of the ringgit against the dollar.
“Berjaya Food Bhd (BFood) and Padini are beneficiaries of a stronger ringgit. Half of BFood’s raw material is purchased in dollar while 70% of Padini’s raw material is sourced from China.”
The research house said sluggish improvement to economic fundamentals could also cause a de-rating of the sector.
“A sluggish recovery in economic fundamentals which could result in high operational costs and a weak ringgit may dampen the recovery in consumer sentiment.”
AmInvestment Bank Research also said a sharp decline in global economic conditions could negatively impact the overseas ventures of companies under its coverage.
“Overseas operations’ contribution to total sales in Power Root and LHI makes up around 50% and 70% respectively.”
TA Securities said it expects the ringgit to strengthen mildly against the dollar at an average rate of RM4.10 to the dollar in 2020.
“This projected 1.2% appreciation of the ringgit against the dollar is generally positive for the companies who are net importers, ” it said.
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