Consumer - Retail - Guarded optimism

We are maintaining our Neutral rating on the Retail sector.  We are expecting a moderate growth in 2013 as compared to  2012 due to the possibility of subsidies cut and higher inflation rates. Retailers are also gearing up for a possible slowdown by maximizing staff performance and taking a cost-effective  measurement to comply with minimum wages, which is effective in Jan 2013.  Prior to the 13^th  GE, we believe the sector should be well supported by its decent yield and relatively resilient earnings prospect in 2013. Post the 13^th  GE, we foresee more headwinds ahead for the retail sector as the government could undertake the much needed structural fiscal reform, which will adversely affect the consumers’ disposable income and dampen the consumers’ sentiment in 2013 and 2014. We will monitor the changes and revise our rating for the sector accordingly then if needed. At this juncture, we are maintaining our MARKET PERFORM calls on Amway (TP: RM11.68), Eng Kah (TP: RM3.57) and Parkson (TP: RM4.50) and an UNDERPERFROM call on AEON (TP: RM11.30).

Resilient Consumer Sentiment Index (CSI). According to MIER (Malaysian Institute of Economic Research), the CSI, an index  which measures consumers’ attitudes towards the economy, has increased 3% QoQ to 118-point in 3Q12 as compared to 2Q12 due to factors such as consumers feeling that their employment outlook has become cautiously optimistic, current and expected income have improved, inflationary expectations have eased, more jobs are expected. Hence, consumers are in the mood to spend. The lowest CSI index point reached occurred in 2008 (at 70-90 points) previously due to the global financial crisis then, which caused a lower job employment, lesser current and expected income, fear of higher prices and a more prudent consumer spending. On the hand, the highest index point of the CSI was at 110-116 points in 2010 due to rising current and expected income gains and better job prospects.  

Cautious outlook going forward. Due to the resilient domestic demand despite the negative developments overseas, MIER has upgraded its 2012 and 2013 growth forecasts for the Malaysian economy to 4.9% and 5.4% respectively. Our in-house economic team believes that the CSI will be better in 2H2013 compared to the 1H as the latter could be impacted by the GE. However, we remain concerned on the EBIT margin of these companies with the increasing competition and rising operating expenses such as staff and rental costs. 

Pre and Post GE outlook. Prior to the 13th GE, which is widely expected in 1H13, we believe the sector should be well supported by its decent yield and relatively resilient earnings prospect in 2013. Post the 13th GE, we foresee more headwinds ahead for the retail sector as the government (assuming the incumbent remains in power) could undertake the much needed structural fiscal reform by resuming its subsidies rationalisation programme such as raising electricity tariffs and implementing the GST in 2014, which will adversely affect the consumers’ disposable income and dampen the consumers’ sentiment in 2013  and 2014. We will monitor the changes and revise our rating for the sector accordingly then if needed.

Source: Kenanga