Consumer Products & Services
Consumer Sector - Bracing for further headwinds
Fri, 05-Jan-2024 10:37 am
by Kenneth Leong • Apex Research

Review 

Inflationary pressure continues to beset the consumer sector in 2H23, despite the overnight policy rate turns stable in recent MPC meetings. Retail sales growth continues to ease to 3.9% yoy in October 2023; the slowest pace of gain since December 2021. While unemployment rate held steady, we gather that Malaysian Institute of Economic Research (MIER) consumer sentiment index continues to taper towards 78.9 in 3Q23 which highlights concerns over the stagnating wages will keep the battle with inflation at an uphill task.

Still, the Bursa Malaysia Consumer Product and Services Index witnessed 3.8% improvement in 2H23, possibly driven by multiple year end festive occasions. To cap off, the aforementioned index slipped 5.6% yoy in 2023 to close at 553.68 pts, mainly dragged down by weakness in 1H23 following a series of interest rate hikes by Bank Negara.


Outlook

Going into 1H24, we anticipate challenges persist with introduction of several taxes, higher sales tax and subsidy rationalisation program (although the latter may only take place towards 2H24 and is expected to be implemented in stages). We opine the RM10.0bn Rahmah cash handout and lump-sum cash incentives for civil servants and government retirees allocated under 2024 Budget may not be sufficient to cushion the prospect of weaker domestic spending. With the introduction of EPF Account 3, this may provide some alleviation, but potentially at the cost of longer-term consequences.

Consumers will have to bear with the prospects of higher cost of living, moving into 2024 and the process of adapting is expected to be gradual. All, however, was not bleak as the expectations of improved tourist spending will continue to provide upliftment towards retail sales growth. For now, we expect retail sales growth continue demonstrating improvement, but at a slower pace.


Valuation & Recommendation

While challenges persist, our coverage with the top pick would be CCK Consolidated Holdings Berhad (BUY, RM0.96), riding onto the floating of poultry prices, coupled with undemanding valuations. Sector wise, the average forward PE for the consumer is at 17.6x and 15.1x for 2024F and 2025F which is fair against 1Y average of 16.5x.

Recommendation: Neutral
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