Consumer spending on track for recovery

RHB Research upgraded Leong Hup International Bhd (LHI) to “buy” from “neutral".

PETALING JAYA: The anticipated recovery in consumer spending in the second half of the year, aided by government policies and spending and a ramp-up in vaccination, will be a positive driver for the economy.

According to the Malaysian Institute of Economic Research (MIER), consumer sentiment had further rebounded in the first quarter (Q1) of this year to just below the optimism threshold as consumers showed signs of adjusting to the new normal.

The progress in the vaccination rollout and the recovery in both domestic and global economies also point toward better income and job prospects ahead, which bode well for consumer spending.

RHB Research said consumer companies were expected to further benefit from the recovery in consumption.

The research house noted that companies in the sector had generally shown decent earnings in the first quarter, with nine companies under its coverage reporting year-on-year (y-o-y) revenue growth. Seven out of 15 companies under its coverage reported earnings within expectations, while five underperformed.

“Sector revenue in Q1 grew 7.7% y-o-y or 4.8% quarter-on-quarter (q-o-q). This could have been driven by the more relaxed enforcement of lockdown measures in early Q1, the low base effect of Q1 2020, and the continuous capacity expansions by some of the companies, ” it said in a recent report.

While the latest round of lockdown will lead to another disruption to business operations and undermine consumer sentiment, the impact is not expected to be as severe as that of the first movement control order (MCO) last year, which caused a couple of companies to book operational losses.

More sectors have been allowed to operate this time around and businesses and consumers are gradually adapting better to the new normal. RHB highlighted that mobility trends also indicate that activities have not declined as much as during MCO 1.0.

“But to mitigate the impact, some manufacturers that are allowed to operate have realigned their production lines to prioritise the higher-yield areas, ” it said.

Meanwhile, the pandemic has propelled retailing companies to push for greater exposure in online sales platforms than before, and cost structures have become leaner following a series of initiatives to trim fixed costs since the pandemic began.

Nonetheless, the brokerage expected sector earnings volatility to persist in the near term, particularly within the consumer discretionary space given the business disruptions arising from rolling lockdowns and fluctuations in new Covid-19 cases.

RHB remained “neutral” on the consumer sector, noting that it had upgraded Leong Hup International Bhd (LHI) to “buy” from “neutral” and downgraded Power Root Bhd to “neutral” from “buy” during Q1.

Its top picks included MR DIY Group (M) Bhd, which displayed “gravity-defying growth”, Guan Chong Bhd as a proxy to the ever-growing demand for the timeless cocoa product, MyNews Holdings Bhd, Berjaya Food Bhd and LHI.

“Our ‘buy’ calls are mostly in the small- to mid-cap space, that make up about 33% of the sector’s total market capitalisation. However, the larger cap consumer names have strong defensive qualities that are now better positioned to mitigate against near-term market risks, ” RHB said.

Notably, risks to its recommendations include delays in the progress of vaccinations and a prolonged Covid-19 pandemic.

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