On the overall,
F&B consumer stocks under our coverage have reported earnings to date that
are mostly in line with our earnings estimates. We are expecting a stronger
4Q12 results to conclude a satisfactory earnings year for these companies, buoyed
by the festive season and school holiday period. For now, we prefer big cap companies
such as Nestle. This is because we reckon these companies would have a better
scale to handle the implementation of the minimum wages, which will be effective
in Jan 2013. Heading into 2013, we are expecting a much softer consumer spending
given the moderating private consumption numbers. Nevertheless, food and
beverage being staple goods should be more resilient and probably the last item
consumer will cut for savings. All in, we are expecting a moderate growth for the
F&B sector next year, assuming there will be subsidies cut and a higher inflation
rate for the year. Meanwhile, commodities prices are likely to rise for 2013 due
to the global supply squeeze although we believe that the rise would likely be manageable
to F&B companies. Underpinned by the above reasons, we continue to focus on
a “Buy-On-Weakness” strategy for these consumer stocks, especially on those
where we are seeing values emerging and with a decent dividend yield. With 4
out of 6 stocks under our coverage being on OUTPERFORM calls, we are upgrading
the F&B sector rating from NEUTRAL to an
OVERWEIGHT with OUTPERFORM calls on Nestle (TP: RM72.10), Oldtown (TP:
RM2.40), Kian Joo (TP: RM2.79) and QL Resources (TP: RM3.50). Meanwhile, we are
retaining our MARKET PERFORM calls on DLady (TP: RM45.50) and Cuscapi (TP:
RM0.41). We have ceased coverage on GW Plastics (TP: RM1.19) due to the
disposal of all its business operations to Scientex recently.
2012 in line.
Overall, F&B consumer stocks under our coverage have reported earnings results
to date that were broadly in line with our earnings estimates except for Kian
Joo and QL Resources. We believe a stronger 4Q12 would likely come in and to
end the year satisfactorily on the back of efficient marketing and promotions
during the festive season and school holiday period in the quarter.
What’s up for 1Q13?
With the implementation of minimum wages effective next month, we believe that
this policy will likely hit some of the small to medium size companies.
Although many of them have denied any negative impacts, we reckon that the
bigger size companies such as Nestle and DLady will still have a better scale
to overcome the issue. In fact, these bigger companies may not even see any
impacts as they may have already paid their staffs above the minimum wage
level. Thus, we are still in favour of the bigger capitalization stocks for
1Q13 and have chosen Nestle as our top pick for the quarter.
Looking ahead to
2013. In CY13, we believe that consumer spending will be softer than this year
given the moderating private consumption growth YoY. Nevertheless, food and
beverage will likely be the last item that consumers would cut for savings.
Thus, the sales growth for F&B companies is likely to be sustainable next
year. Nevertheless, we believe that there will be higher commodities prices
next year due to the supply squeeze going forward although at this juncture, we
believe the expected increase will still be manageable on the companies. Thus, we
have pretty much maintained the gross profit margins of the companies for CY13.
Upgrading to
OVERWEIGHT. We have upgraded our NEUTRAL stance on the sector to OVERWEIGHT as we have 4 out of the 6
stocks under our coverage on OUTPERFORM calls. Our strategy continues to focus
on a “Buy-On-Weakness” approach, especially on the defensive and
high-yielding stocks. As for now, we prefer
Nestle (OUTPERFORM; TP: RM72.10) and Oldtown (OUTPERFORM; TP: RM2.40) to the
others as their share prices have corrected during the weaker market sentiment
in Nov 2012 after running up earlier in the year. These two stocks also offer a
decent dividend yield of about 3%. We have picked Nestle as our top pick for
the quarter. Meanwhile, we also have OUTPERFORM calls on Kian Joo (TP: RM2.79)
and QL Resources (TP: RM3.50) and MARKET PERFORM calls on DLady (TP: RM45.50)
and Cuscapi (TM: RM0.41).
Stronger 3Q pushed up
full year results. On the overall, F&B consumer stocks under our
coverage reported earnings to date, which were broadly in line with our
earnings estimates except for Kian Joo and QL Resources. The 3QCY12 and 9MCY12
net profits for the F&B stocks under our coverage grew 14.9% and 8.8% YoY
respectively. We saw a better 3Q YoY growth for all except for the slight drop
in QL Resources and Kian Joo. We believe the stronger YoY net profit growth of
DLady, Nestle and Oldtown in 3QCY12 was mainly attributed to 1) the higher
consumer spending during the school holiday period and Hari Raya festival in
the quarter, 2) stabilising input costs and 3) a favourable sales mix. Due to
their better-than-expected results, we subsequently adjusted DLady and
Oldtown’s earnings upwards by 2.8% and 6.4% respectively after the results. We
also revised down the earnings of QL Resources by 7% after its results due to
the lower earnings from its palm oil activities.
Moderate growth next
year. Heading into CY13, we believe that consumer spending will be softer
next year as the private consumption growth has moderated YoY as shown in the
chart below. Nevertheless, food and beverage would be the last item that
consumers would cut for savings. Thus, the sales growth for F&B companies
will still likely be sustainable next year, supported by growing demand from
the 2% population growth per annum; the implementation of minimum wages, which
will increase the disposable income of the lower-income group, and the efforts made by companies to
increase sales volume, including the introduction of new products or more efficient marketing activities. This is
actually in line with our FY13E sales growth (YoY) forecasts for the companies
ranging from 5.9% to 15.0%. The majority here is expected to register a more moderate sales growth of less
than 10% YoY. However, we are expecting a double-digit sales growth rate of 15%
for Oldtown on the back of the stronger export sales growth of its instant
coffee mix products, as well as the regional expansion of its café outlets.
Under control so far.
Despite a price spike in wheat and soybean, a few months back, things are still
within control for the F&B companies as we have not seen any of their
earnings being depressed by the price hike. In fact, for companies such as
Nestle, its margin actually expanded YoY partially due to its stable input
cost. Furthermore, many of the commodities prices are actually still lower on a
YoY basis at this juncture despite the global weather catastrophes. Based on
Bloomberg’s 2013 consensus forecast, commodities prices are likely to see
increases of between 4% and 22.2% by the end of 2013. The double-digit increases are mainly expected for sugar and
CPO prices, which are currently trading at lower levels after a steep decline,
while wheat and soybean prices are expected to decline from their current high
levels by 3%-9%. We believe the increase would be likely due to a supply
squeeze going forward, although hopefully, the weaker global growth may lower
demand enough to curb a too volatile price jump in these commodities despite
their lower supply. In any case, we still believe that commodities prices will
still hover at around their current levels at least for 1Q13 before the
shortage of supply kicks in thereafter to spur a price rise. As we believe that
commodities price rise ahead would still be bearable for the F&B companies
(not as volatile as a year ago where rises were high and spread across the
board), we have pretty much maintained the gross profit margins of the
companies in the sector for CY13.
Broadly an
outperformer. The F&B sector has so far performed well this year as its
defensive property and high dividend yield made the sector attractive to
income-seeking investors during the current uncertain market conditions. Our
studies show that selective F&B stocks for the year have registered good
returns of 21.0%, 47.0% and 52.2% for the big, medium and small-cap consumer
groups respectively. In fact, a few consumer stocks saw a doubling of their
share price such as DLady and Power Root. This was in line with our initial
Overweight call on the sector in our 1Q12 strategy, although we subsequently
downgraded the sector rating to Neutral at later dates. In any case, the recent
correction of the market has sent most of the F&B share prices down. Thus,
we have recently upgraded our call on Nestle to an OUTPERFORM again with a TP
of RM72.10 while maintaining OUTPERFORM calls on OLDTOWN (TP: RM2.40), Kian Joo
(TP: RM2.79) and QL Resources (TP: RM3.50). Meanwhile, we have MARKET PERFORM
calls on DLady (TP: RM45.50) and Cuscapi (TP: RM0.41). With the dividend yield
compression returning to more decent levels, we believe there could be another
round of run-up in consumer stocks before the elections. As four out of the six
stocks that we cover are now on OUTPERFORM calls in our F&B portfolio, we
are upgrading the sector from a NEUTRAL back to an OVERWEIGHT rating.
Ceased coverage on GW
Plastics. We continue to like the packaging industry due to the lower resin
price cycle, which would benefit the flexible packaging manufacturers.
Nevertheless, due to the recent disposal of its subsidiaries to Scientex, the company
will eventually be an empty shell. Thus, we have recently ceased coverage on GW
Plastics in favour of potentially initiating coverage on Scientex after the
completion of the corporate exercise between the companies. To recap, we
initiated the coverage on GW on 12 Dec 2011 with an OUTPERFORM call and a TP of
RM0.86 when its share price then was at RM0.64. Our bullish call was maintained
throughout the whole year with revised TPs of RM0.92 and RM1.19 in Aug and Oct
2012 respectively. We ceased our coverage on 12 Nov 2012 due to the reason
mentioned above with the stock having seen a capital appreciation of 73.4% at
the time from our first recommended level.
Source: Kenanga
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