Retail sector remains challenging as consumers still wary
KUCHING: The retail sector remains challenging in Affin Hwang Investment Bank Bhd’s (AffinHwang Capital) view as consumers remain wary of trends.
AffinHwang Capital noted that while the Malaysian Institute of Economic Research’s (MIER) consumer sentiment remained low at 73.6 in the third quarter of 2016 (3Q16) - a slight pickup from an alltime low of 63.8 in 4Q15 since the global financial crisis - it is still below the 100-point threshold.
“According to Nielsen, Malaysian consumers are among the least confident in Asia Pacific,” the research firm said in a sector update.
Given potentially higher transport costs and food prices partly due the removal of the cooking oil subsidy, the research firm’s economist forecasted a higher full-year inflation rate of 2.7 per cent in 2017 versus 2.2 per cent in 2016E.
On a comparative basis, AffinHwang Capital highlighted that MIER’s retail trade index improved to 111.6 in 3Q16, above the 100-point threshold, which seemed to indicate that expected sales and business conditions will strengthen.
To note, Retail Group Malaysia forecasted five per cent year on year (y- o-y) growth in 2017 versus three per cent y- o-y in 2016E and 1.4 per cent y- o-y in 2015, expecting a boost on increased tourist arrivals.
“Budget 2017’s key initiative to increase government aid under the 1Malaysia People’s Aid (BR1M) scheme by as much as 20 per cent with an allocation of RM6.8 billion and special assistance of RM500 to all public servants should also help boost consumer spending,” the research firm said.
AffinHwang Capital has nonetheless affirmed that the retail sector remains challenging, with earnings before interest and tax ( EBIT) margins and same- store sales growth ( SSSG) in a downturn.
The research firm pointed out that the food and beverage (F& B) segment will likely be hit by higher raw material prices moving forward.
As for the tobacco segment, while it lacked positive catalysts, British American Tobacco ( Malaysia) Bhd’s ( BAT) share price has come down and now offers dividend yields of five per cent or more, on AffinHwang Capital’s estimates.
Meanwhile, AffinHwang Capital was generally still positive on the brewery sector, which had done well in previous quarters, and the research firm liked its two stocks, Heineken Malaysia Bhd and Carlsberg Brewery Malaysia Bhd, for their dividend yields.
“We expect domestic consumer spending to recover slowly in 2017, as consumer sentiment is expected to improve from its low base, supported by stable labour market conditions and a large young population,” it said.
All in, AffinHwang Capital maintained ‘neutral’ on the consumer sector, advising investors to focus on companies with defensive characteristics and attractive dividend yields.