Kenanga upgrades consumer sector to 'overweight'

KUALA LUMPUR: Kenanga Research has upgraded the consumer sector to "overweight” on the back of its bullish view on midmarket retailers.

This comes as consumers rekindle shopping in person, with the midmarket retailers’ customer base skewed towards the middle 40 per cent (M40) income group whose spending power is less impacted by the high inflation given their healthy household balance sheet, as well as their ability to pass on higher costs and hence maintain their margins.

However, Kenanga Research acknowledged that consumption has softened, but will sustain, citing the Malaysian Institute of Economic Research (MIER) second quarter 2022 (2Q 2022) consumer sentiments index (CSI), which fell 23 points to the 86 mark, below the consumer optimism threshold.

"Based on our in-house forecast of 15 per cent for the full year, growth is expected to taper off going forward as interest rate hikes and inflationary pressure squeeze consumption.

"We project consumption to soften from August onwards due to tighter financial conditions following Bank Negara Malaysia’s back-to-back rate hikes,” it said in a research note today.

On top of that, it noted that the rising cost of living and impending global recessionary pressures due to China’s persistent zero-COVID-19 policy and Europe’s worsening energy crisis may also lead to a decline in consumer spending.

"We continue to expect growth in private consumption on the back of the reopening of the economy, but overall growth is expected to normalise significantly,” it shared.

However, Retail Group Malaysia (RGM) member associations, the Malaysian Retailers Association (MRA), and the Malaysian Retail Chain Association (MRCA) are positive about the robustness ahead with the retail industry average growth rate expected at 62 per cent in the third quarter, Kenanga Research noted.

Department store-cum-operators are also expecting sales to reach 99 per cent year-on-year with the fashion and accessories sector at 165 per cent on year in the third quarter due to the firm recovery of the Malaysian retail industry since the beginning of this year

RGM has revised its growth target for the retail industry to 32 per cent on year from 13 per cent previously, the research firm noted.

Meanwhile, Kenanga said while food and beverages (F&B) producers are likely to sustain their sales, this will be achieved at the expense of margins.

F&B producers have little room to hike prices as their customer base is skewed towards the bottom 40 per cent (B40) group that is harder hit by the high inflation, it noted.

"F&B producers face renewed economic challenges such as elevated input and logistics costs arising from inflationary pressures,” it added.

Kenanga Research's top picks in the sector are AEON with an "outperform” call with a target price (TP) of RM1.95 and Padini, also at outperform with a TP of RM4.10. - Bernama

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