Shopping spree to boost consumer sector

Retail therapy: Shoppers at a mall in the country. Analysts expect shopping during the festive season will lift earnings in the consumer sector.

PETALING JAYA: The year-end festive shopping season is expected to lift the earnings of consumer-sector players in the last three months of 2023.

A steady uptick in consumer spending after the six state elections last month would also provide a boost to market sentiment, bolstered by the government’s accelerated implementation of policy initiatives.

In a note, Kenanga Research said its outlook is further supported by a stable job market and indications that inflation has reached its peak.

The research house is maintaining its “overweight” outlook on the consumer sector, with its top picks being Dutch Lady Milk Industries Bhd, Fraser & Neave Holdings Bhd and Padini Holdings Bhd.

“We now see greater opportunities for food and beverage players (consumer staples) that offer top-line defensiveness while their margins are poised for improvement as food commodity prices ease.

“Meanwhile, the outlook of departmental store operators or apparel retailers (consumer discretionary) may be dented by the introduction of a targeted fuel subsidy as the subsidy reform will erode spending power of their key customer demographic group, namely the middle 40% (M40) group.

“On the retail side, we foresee a potential consumer shift toward more cost-effective products, especially if inflationary pressures continue.

“This trend could notably benefit Padini, which has been actively expanding its value-for-money product range,” according to Kenanga Research.

Commenting on the consumer sector’s results in the second quarter of 2023 (2Q23), the research house said there was no marked sequential improvement in earnings delivery against its forecasts.

About 75% of the sector results aligned with Kenanga Research’s expectations and 25% were below forecast.

“Looking ahead, we anticipate muted 3Q23 results for industry players, especially the department store segment, due to the absence of key festivals, and persistent inflationary pressure which is driving cautious consumer spending.

“In addition, the general public had already adopted a cautious stance leading up to the mid-August conclusion of elections in six states, compounding the pre-existing challenges of a muted market sentiment,” it said.

On the prices of commodities, Kenanga Research said it has observed a softening trend including for milk, wheat, corn, and their freight costs.

It pointed out that these commodities appear to have reached their recent peaks, with prices experiencing a decline of over 20% year-to-date.

“Having said that, we also observed that sugar and cocoa prices have experienced a significant uptick with prices surging more than 20% year-to-date.

“Robust sugar prices can be attributed to a series of factors including unseasonal rainfall in India, subpar beet crops in Europe, and drought conditions during the summer.

“Similarly, the strength in cocoa prices is largely due to adverse weather conditions in West Africa, impacting cocoa production,” Kenanga Research said.

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