Consumer stocks have continued to climb and outperform the
FBMKLCI index, sending consumer stocks to their record high PER valuations. We
believe consumer stocks will continue to be the excellent defensive plays against any economic uncertainties.
However, due to their demanding valuations, we are maintaining only a NEUTRAL
call over the consumer staples sector and suggest a “buy on weakness” strategy,
especially on undervalued stocks with high dividend yields above that of the
overall consumer product index (4.1%) and FBM KLCI index (3.6%). Meanwhile,
commodities prices are expected to hover around their current levels or move
higher on the back of excess liquidity pumped into economies worldwide. This
would affect the smaller scale companies but probably not the MNCs as the
latter have the capabilities and scales to manage their commodity raw material
costs. Given all the above considerations, we are maintaining our NEUTRAL call
on the overall consumer F&B sector. Likewise, we continue to have OUTPERFORM
calls on QL Resources (TP: RM3.68), DLady (TP: RM35.60), GW Plastics (TP:
RM0.89) and our top pick, Kian Joo (TP: RM2.50). Meanwhile, for the other
consumer stocks, we are retaining our MARKET PERFORM calls on BAT (TP: RM58.70)
and Nestle (TP: RM58.00) with an UNDERPERFORM on Kawan Food (TP: RM0.86).
Speaking of laggards.
Bursa Malaysia’s Consumer Product Index has been rerated since 2010 with its 9x PER valuation
rising to 15x PER now. It had once reached a higher level of 18x PER in 2009.
At its current valuation, we remain positive on the sector on the back of its higher
dividend yield of 4.1% as compared to FBM KLCI Index’s 3.6%. This is mainly due
to the market uncertainty and thus a higher risk aversion, leading investors to
adopt a more defensive stance. Although we are maintaining our neutral call on
the sector, we suggest investors to buy into weaknesses in the sector. Under
our consumer staples universe, we believe Kian Joo is undervalued and is very
likely poised for a rerating that given
that the tussle over the company involving suit cases in court should be ending
soon after the appointment of two Can-One directors on its board. On top of
that, its high dividend yield of 6%-7% is above the market rate, limiting the
downside risk in the stock.
Manageable raw
material prices. World commodities prices continue to experience volatility,
especially in soybean and wheat prices. Due to the adverse weather conditions, speculation
of supply shortage has caused soybean prices to surge by 15% (YTD). However, the
price jump seen in wheat in May has normalised from USD704/bushel to
USD609.5/bushel lately. Moreover, despite the price volatility in the first six
months, the majority of the other commodities’ prices have remained stable and
relatively lower than 2011. In addition, some of these commodities-related
businesses have not suffered from any significant margin compressions. Thus, in
the remaining months of 2012, we expect commodities prices to be maintained at
their current levels or slightly higher ahead with no material impact to our
F&B companies. The commodities prices will be driven by a few major
factors, i.e., the creation of excess liquidity into the economies, an
improving US economy, global weather and climate uncertainties and also land
scarcity, which limited the supplies.
Bonuses to boost
spending. The Government’s generous goodies distribution to the households,
especially the lower income class, has lifted the overall consumer spending
since Budget 2012. This is evident from the fact that Malaysia’s private
consumption growth has been well supported despite the ongoing global economic
slowdown. The minimum wage policy has also contributed to a sustainable
spending growth with none of the stocks under our coverage being affected
negatively as the majority of them have already fulfilled the minimum wage
before its implementation. However, we remain
neutral on consumer spending as the initial euphoria could potentially
fade off quickly after the general election.
Source: Kenanga
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