Potential election goodies, M&A opportunities could boost sector

“Also, an increasingly competitive operating environment and weak consumer market may restrict companies’ ability to pass on the rising cost.”

In fact, the firm expect margin compression to be the key earnings downside risk going forward for consumer stocks under its coverage.

Potential victims include Padini Holdings Bhd (Padini) and MSM Malaysia Holdings Bhd (MSM), with the former sourcing about 70 per cent of its products from China, denominated in renminbi, and the remainder mainly in US dollar.

“As such, the ringgit’s persistent weakness against both currencies could continue to increase Padini’s inventory cost and put downward pressure on its margins in the coming quarters,” it added.

“We are also concerned that the recent hike in MSM’s selling price is not sufficient to cover the higher production cost due to the significant increase in its US dollar denominated raw sugar costs.”

One positive theme to watch for in 2017 will be the potential election goodies next year.

AllianceDBS noted that the government is poised to hold a general election (GE) latest by May 2018 and the market is anticipating that the election will take place in 2017, with some even expecting as early as 1Q 2017.

Nevertheless, Prime Minister Datuk Sri Najib Tun Razak has dampened such expectations recently by stating that he “was in no hurry to call for an election given the current lack of feel-good factors among Malaysians.”

“As such, we are not surprised if the government announces additional stimulus measures next year to create feel-good factors prior to an election,” it added.

Another gem to keep an eye out for is in merger and acquisition (M&A) opportunities for cash-rich companies.

Given the current challenging operating environment for the sector, companies with healthy cash positions like coffee franchise OldTown Bhd and publisher Sasbadi Holdings Bhd are looking to engage in earnings-accretive acquisitions to boost their growth prospects.

“To note, OldTown is actively pursuing M& A opportunities in F&B operations to enhance earnings while Sasbadi has openly stated its desire of making at least one value-accretive acquisition per annum to sustain growth.”

While AllianceDBS Research remained cautiously optimistic that consumer spending will continue along its recovery path moving into 2017, supported by government stimulus, hike in minimum wage in July, and fading effect of GST, it remained concerned that the slower-thanexpected recovery could be the ongoing theme for next year.

“We remain cautious on the Malaysian consumer sector as we do not foresee any significant rerating catalyst at this juncture.”