Commodity prices remain volatile and hence companies with
high exposure to commodities will likely continue to face challenging times ahead
to maintain their profit margins such as flour millers and poultry players.
That said, the recent “people-friendly” Budget will continue to help spur
consumer spending and eventually benefit the F&B players. This could
potentially help to mitigate the anticipated higher raw material cost above.
Given the current pre-election jitters, we are expecting the record high PER
valuations of stocks to take a breather
for now (see our previous report on this dated 10/9/2012). Nevertheless, we
expect the correction in the consumer stocks share prices to be mild only compared to others in the
market due to 1) the defensiveness of these stocks, 2) continuous news flows of
corporate activities and 3) continued strong interests from local and foreign
institutional investors for consumer plays. Hence, on balance, we are maintaining
our NEUTRAL call on the overall consumer F&B sector. We advocate an “accumulate”
strategy for these consumer stocks if
their share prices correct as expected, especially on those that we see
with value emerging and high dividend yield. Hence, we continue to have
OUTPERFORM calls on QL Resources (TP: RM3.68),
Kian Joo (TP: RM3.00), Oldtown (TP: RM2.26), Nestle (TP: RM67.50), and Cuscapi
(TP: RM0.41). Meanwhile, for the other consumer stocks, we are retaining our
MARKET PERFORM calls on BAT (TP: RM58.70), DLady (TP: RM44.60) and GW Plastics
(TP: RM0.92)
Accumulate positions
on expected weakness. F&B consumer stocks have gone through a rerating
phase with some stocks under our coverage having appreciated by more than 100%.
Given the current pre-election jitters and also the relatively high PER
valuations and dividend yield compressions of these consumer stocks as
mentioned in our previous sector report dated 10/9/2012, we reckon that the
rallies in these stocks could take a breather in the coming months. However, we
believe that the corrections will be mild due to 1) the defensiveness of these
stocks, 2) continuous news flows of corporate activities and 3) continued
strong interests from local and foreign institutional investors for consumer
plays. As a result, we recommend a ‘buy on weakness” strategy for investors
here to build up their portfolio position in the sector for the long run,
especially on stocks like DLady (MARKET PERFORM; TP: RM44.60), Nestle (OUTPERFORM;
TP: RM67.50) and Oldtown (OUTPERFORM; TP: RM2.26).
Challenging times
ahead. World commodities prices continue to experience volatility, especially
in corn, soybean and wheat prices. Due to the adverse weather conditions, speculations
of supply shortages have caused soybean and wheat prices to surge by 31% (YTD)
and 33% (YTD) respectively. However, we do not think the current condition is
alarming as it is not comparable to the 2008 commodity boom, which led to a
panic situation then. This is because the current commodity prices are still
relatively far off below their 2008 levels, and many are still lower than even
a year ago like sugar. Nevertheless, we still believe the volatility could
potentially cause a temporary/minor margin compression for consumer companies, which
may not be able to pass down some of the costs to the end consumers
immediately. The good news is that we
have yet to see any material impacts so far to these companies, but investors
should beware of stocks that have a high
exposure to commodities, nonetheless, such as flour millers, poultry
players and so on.
Bonuses to boost
spending. Looking at the “people-friendly” Budget measures that were announced last week, we anticipate
the government’s generous goodies distribution to the households and
individuals, especially the lower-income class, will lift the overall consumer spending.
This is evident from the fact that Malaysia’s private consumption growth has
been well supported this year by the last Budget despite the ongoing global
economic slowdown. Thus, we believe that Budget 2013 will continue to enhance
the people’s welfare and increase the disposable household income as well. This
could potentially drive consumer spending higher, benefiting the F&B
players and helping them to offset their anticipated higher raw material
costs.
Source: Kenanga
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