KUALA LUMPUR: Despite broad-based price hikes on consumer products, demand remains fairly resilient, supported by the inelastic nature of the market.
Following CGS-CIMB Research’s consumer-based site tour to Kota Kinabalu for domestic institutional investors, it said demand stays resilient although there has been price hikes due to the higher input costs and operating expenses.
The research house is keeping a “neutral” call on the consumer staples segment.
It said its preferred picks are QL Resources Bhd and Farm Fresh Bhd due to their strong brand equity and defensive nature.
It believes QL’s marine product manufacturing segment could post stronger quarters, driven by strong orders for its fish meal and surimi-based products on pent-up demand in in-home consumption and supply disruption from India, Vietnam and Russia.
“Despite the rising input costs and minimum wage hike, QL is also confident of mitigating the rising costs.
“This will be achieved through price hikes to pass on the additional costs.
“It will also adopt higher economies of scale via higher transaction volume in a bid to protect its margin,” it said.
Meanwhile, for its integrated livestock farming segment, the research house said QL expects a minimal impact to its feed raw material trading business from higher input costs on steady volume and margin due to price hikes.
“QL is also witnessing strong demand for poultry products due to supply shortages and coupled with feed cost subsidies, it is optimistic of better quarters ahead,” it said.
As such, CGS-CIMB Research is keeping an “add” call on QL with a target price of RM5.60, driven by the defensive nature of its various businesses, strong brand name and strong proxy for consumer spending recovery.
Meanwhile, CGS-CIMB Research is keeping a “add” call on CCK Consolidated Holdings Bhd, which is the largest producer of poultry products in Sarawak, with a target price of 81 sen.
“Besides its attractive valuation of 9.2 times price-to-earnings ratio based on calendar year 2023, we like CCK for the defensive nature of its retail business, its captive market in East Malaysia and the inelastic demand for poultry goods in Malaysia.
“CCK is of the view that its retail operations give it an edge over other poultry players. Its 72 retail stores allow it to tailor its sales mix to mitigate margin compression from price caps.
“As up to 90% of its poultry goods are sold via its own outlets, it is also not under pressure to give discounts to retail-based large-scale customers due to the sharp rise in selling prices,” it added.
The research house noted that CCK is not overly concerned about the impact of higher input costs, which it expects to be mitigated by feed subsidies provided by the government as well as the increase in selling price caps set by the government from July 1 until Aug 22, 2022.