PETALING JAYA: Consumer downtrading will continue to be a central theme for the consumer sector in Malaysia this year amid the rising cost of living.
This will benefit consumer staples stocks such as those in the food and beverage industries, while discretionary stocks will likely see a mixed performance in 2023.
As such, CGS-CIMB Research, which retained its “neutral” stance on the overall consumer sector, has advocated selective play to maximise potential gain in times of inflation.
“We favour consumer staples in an inflationary environment and advocate certain discretionary stocks on strong brand profiles and downtrading activity,” the brokerage said.
In its sectoral report published yesterday, CGS-CIMB Research said consumer downtrading would benefit consumer staples stocks, such as CCK Consolidated Holdings Bhd, Kawan Food Bhd, Fraser & Neave Holdings Bhd (F&N), Power Root Bhd and QL Resources Bhd, given the potential higher in-home food consumption and defensive demand for daily necessities.
It also expected Kawan Food, F&N, Power Root and QL to benefit from strong export demand on a weak ringgit and lower freight charges.
In the discretionary space, CGS-CIMB Research was positive on MR DIY Group (M) Bhd, Bonia Corp Bhd, Innature Bhd and MyNews Holdings Bhd for their differentiated and value product offerings versus peers, and stronger pricing power, backed by established brand equity and a sizeable loyal customer base.
“We view consumer affordability as a key challenge in 2023 as consumer spending power could be eroded by high inflation and rising interest rates,” CGS-CIMB Research said.
“While we expect input costs to ease in 2023, the impact should be offset by rising operating costs and weaker consumer spending power. However, we believe the current overall sector valuation (trading near its five-year mean) has largely priced in the weakening consumer sentiment and earnings prospects,” it explained.
CGS-CIMB Research pointed out that input costs could ease this year, thanks to lower commodity prices, as the global supply chains gradually return to normalcy, leading to higher production volume, which could improve the supply-demand dynamics.
This development, coupled with declining freight rates, could benefit consumer companies, especially food and beverage manufacturers and retailers (in terms of margins) as they had raised prices over the past one year.
However, the brokerage noted that minimum wage hikes, labour shortage, aggressive expansion drive, rising electricity costs and costs related to environmental, social and governance initiatives had contributed to higher operating costs.
Meanwhile, CGS-CIMB Research said potentially large allocations in the revised Budget 2023 in terms of subsidies provided, including direct cash handouts, special assistance payments and personal income tax cuts, as well as minimum wage hikes, will partially alleviate the rising cost of living and support spending towards daily essentials.
The revised Budget 2023 will be tabled on Feb 24.
The brokerage also expects the reopening of China’s economy and international borders from January 2023 to bode well for consumer companies with exposure to China’s domestic market such as QL, Power Root and Kawan Food.
In addition, the expected gradual return of foreign tourists in 2023, especially those from China (Malaysia’s third-largest source of international arrivals and second-highest spending tourists in 2019), could result in positive spillover effects on companies in Malaysia with overseas exposure, such as food and beverage manufacturers (F&N), luxury goods (Bonia), personal care foods (InNature) and convenience store operators (MyNews, 7-Eleven Malaysia Holdings Bhd and Family Mart (QL).
CGS-CIMB Research’s estimates said foreign tourists made up 5% to 10% of their total annual sales on average pre-Covid-19.