KUALA LUMPUR: Affin Hwang Capital Research believes that consumer spending pattern will likely remain flat in 2017 but could possibly recover slowly in 2H17 as private consumption remains resilient.
It said on Thursday the retail sector will remain challenging, whereas the food and beverage (F&B) segment will likely be affected due to the increase in raw material prices.
Illegal cigarettes remain a key problem for the tobacco market, but 2H17 may show a margin expansion for BAT as cost savings may come into play from sourcing cigarettes regionally, the research house said.
“We are generally still positive on the brewery sector as they seem to be more resilient and less affected to downturns and we like Heineken and Carlsberg, for their dividend yields, with the first being our top pick.
“Maintain Neutral. We recommend investors to focus on companies with defensive characteristics and attractive dividend yields,” it said.
Affin Hwang Research said 2016 ended with sentiment indices remaining weak for both the consumer and retailer. Inflation has spiked in January 2017, and overall it estimates inflation to be higher than in 2016.
“While we feel that consumer spending will take longer to recover, we are comforted that macroeconomic indicators such as private consumption still shows resilience and our economist believes Ringgit will strengthen in 2017.
“We maintain our Neutral call on the sector and recommend stocks with solid track record and high yields, with Heineken as our top pick,” it said.
Affin Hwang Research pointed out that 4Q16 net profit for the sector increased by 18% on-year but this does not indicate a recovery in earnings as it was largely due to BAT’s one off gain on disposal of land.
As such, 2016 sector net profit was down 16% on-year due to weak consumer sentiment which affected volumes and higher raw materials as well as operating expenditure.
For 4Q16, both MIER and Nielsen consumer sentiment index dropped further to 69.8 and 84 respectively, both below the 100-point threshold.
According to Nielsen, Malaysian consumers are among the least confident in Asia Pacific and low levels of confidence will probably result in consumer spending being flat at most in the next six months.
Besides, inflation spiked to 3.2% on-year in January 2017 (vs 1.8% on-year in December 2016) mainly due to higher transport costs, food prices and education.
“Our economist forecasts higher full-year inflation rate of 2.7% in 2017 (vs. 2.1% in 2016),” it said.
MIER’s retail trade index decreased to 91.4, reversing from the previous two quarters that were above the 100-point threshold, seemingly indicating that expectations of sales and business conditions have worsened.
“Currently, Retail Group Malaysia forecasts 5% on-year growth in 2017 (vs 3% on-year in 2016E and 1.4% on-year in 2015), but we gather the forecasts are being reviewed and will likely see a downward adjustment,” said the research house.