Expensive valuations keep consumer sector in ‘neutral’

PETALING JAYA: Despite consumer spending expected to be stimulated with BR1M (1Malaysia People’s Aid) payments, tax cuts, and other cash handouts this year, Hong Leong Investment Bank (HLIB) Research is retaining its “neutral” rating on the consumer sector for 2018 as the consumer stocks are already trading at historical highs.

The KL Consumer Index currently trading at 32 time price-earnings (P/E) or two standard deviations above its five-year average P/E of 23.5 times.

The research house said consumer sentiment rebounded slightly last year as consumer spending continued to normalise after the implementation of goods and services tax in April 2015. However, the consumer sentiment index stayed below the threshold level due to a weaker ringgit, with concerns still revolving around the economy and job worries.

Alarmingly, 83% of Malaysians still believe the nation is in a recessionary state according to Nielsen, it noted.

HLIB Research expects consumer staples will benefit from improved consumer spending in 2018.

On the other hand, HLIB Research is of the view that Berjaya Food Bhd’s (BFood) Starbucks Malaysia operations will benefit from the stronger ringgit this year, as 40% of the Starbucks’s cost of goods sold (coffee beans, frappuccino mix) are denominated in US dollar.

Therefore, it advises investors to invest in companies that will benefit from the strengthening ringgit, which is projected to average between RM4.00 and RM4.20 against the US dollar this year against RM4.30 in 2017.

HLIB Research is also positive on the brewers sub-sector due to healthy dividend yields, the unlikelihood of an alcohol excise hike in 2018 and the occurrence of the World Cup, which would boost beer consumption.

HLIB Research’s top picks include BFood and Carlsberg, with a target price of RM2.12 and RM17.90 respectively.