RAM revises outlook on Malaysia’s retail sector
KUCHING: RAM Ratings expects the retail sector to be among the prime beneficiaries of the country’s generally more upbeat consumer sentiment and the string of measures proposed by the new government to alleviate the rising cost of living.
Accordingly, it revised the negative outlook on the retail sector – in place since October 2016 – to stable.
Consumer sentiment has improved markedly following the 14th General Election ( GE14) in May 2018. Notably, the MIER consumer sentiment index (CSI) – a barometer of consumer confidence – surged to a high of 132.9 points in the second quarter of 2018 (2Q18).
Prior to that, the index had been languishing below 100 points for 15 consecutive quarters since 3Q14.
“The CSI hit a trough of 63.8 in 4Q15, subsequent to the implementation of the GST on April 1 2015,” RAM observed.
“The latest RAM Business Confidence Index1also suggests that firms are more upbeat on their business outlook for 3Q- 4Q 2018 post- GE14, with both the Corporate and SME segments displaying higher overall indices after GE14 compared to before the event.
“We expect the zero-rating of the GST effective 1 June to translate into stronger consumer spending and sales for retailers, especially during the three-month tax holiday until the Sales and Services Tax ( SST) is reinstated on 1 September,” highlighted Kevin Lim, RAM’s head of consumer and industrial ratings.
“This view is also shared by Retail Group Malaysia, which had projected a stronger 5.3 per cent rise in retail sales for 2018 from the earlier estimate of 4.7 per cent. In some cases, the move to zero-rate the GST may broaden the operating margins of businesses that have been absorbing GST since its implementation.
Amid promotional campaigns, expansion of outlets and restraint in passing on higher costs to consumers, RAM observed that average post- GST operating margins (for 3Q15 to 1Q16) had mostly narrowed y- o-y compared to the previous corresponding period.
“Consumer spending and retail sales are envisaged to normalise somewhat after the reinstatement of the SST.
“However, the overall tax burden on consumers will be considerably lighter, with the Government’s tax collection estimated to come in at RM21 billion per annum, which is less than half of the amount collected through the GST,” Lim added.
The government has also pledged wide-ranging initiatives aimed at increasing the purchasing power of consumers, particularly lowerincome households.
These measures include the reintroduction of a targeted fuel subsidy as well as a medical subsidy, reduced excise duty on first- car purchases, the gradual abolition of expressway tolls and a higher minimum wage. While details are scant and execution will take time, these moves are deemed positive for the retail sector.
“In the same vein, we anticipate some upside in the sales and operating performances of RAM-rated retailers such as AEON Co ( M) Bhd, F& N Holdings Bhd, Mydin Mohamed Holdings Bhd and Poh Kong Holdings Bhd.
“The more favourable operating landscape is expected to provide some much-needed respite to these players, which have been affected by persistently weak consumer sentiment in recent years,” observed Lim. That said, the retail industry is envisaged to remain highly competitive.
“Additionally, rapidly evolving consumer preferences and the rise of e-commerce are becoming more of a threat, especially for traditional brick-and-mortar retailers.”