Consumer stocks wait to benefit from the economic recovery
Malaysia’s Comprehensive Movement Control Ordinance inevitably dampened sentiment in the consumer sector, which in the last financial quarter turned into a mixed bag of results.
With the acceleration of vaccinations – and the sluggishness of an economic recovery – will consumer stocks soon be back in favor?
As it stands, the Consumer Products and Services Index gained 1.76% over the year, compared to a 2.72% drop in the benchmark FBM KLCI.
Inter-Pacific Securities chief research officer Victor Wan observes that consumer spending will be lower overall during the current lockdown as consumer priority will be given to necessities.
“Even companies like Nestlé (M) Bhd and Dutch Lady Milk Industries Bhd will feel the impact of the two-week lockdown. It depends on how quickly the MCO is lifted.
“Spending was better during the Hari Raya period, but it has decreased since the lockdown was applied,” he told The Edge.
Given domestic uncertainties, he advises investors to focus on stocks exposed to foreign markets, such as Guan Chong Bhd and Kawan Food Bhd. , he notes.
However, it is “neutral” on Guan Chong, the world’s fourth largest cocoa grinder, as it is likely experiencing delivery problems due to a shortage of sea containers.
HLIB Research analyst Syifaa ‘Mahsuri Ismail is much more optimistic. She expects the retail segment to rebound strongly in the second half of the year, driven by the following: progress in vaccination rates and the achievement of herd immunity; relaxation of restrictions with containment of Covid-19; and pent-up consumer demand after the lockdown ends.
“Purchase traffic started to pick up after the end of MCO 2.0 on March 5, 2021, and we expect the same pattern to emerge after HSFO / MCO 3.0. Overall, our recovery thesis remains intact. , supported by the successful containment of the pandemic which should strengthen global confidence and provide clearer visibility on the image of the recovery.
“It is encouraging to see that the average daily jabs administered have increased. In addition, vaccine registration on MySejahtera has exceeded half of the vaccineable population (51.2% as of June 1).
F&B shares will see their margins squeezed
Syifaa ‘, however, expects an uneven recovery in consumer stocks under its cover.
“Our point of view is geared towards the retail segment as we expect F&B and commodities to experience margin squeeze when it comes to rising commodity prices around the world. . “
She adds that the growth of multi-level marketing companies like Amway (Malaysia) Holdings Bhd and Hai-O Enterprise Bhd will be supported by the growing demand for health supplements and home care products in the wake of the Covid pandemic. -19.
“I think the lifestyle change for many will see this trend continue even after the pandemic resumes. “
Convenience store operators will also benefit from the ripple effect of an expected upturn in footfall at transit stations that have been hit hard during various movement restrictions, she predicts.
“Regarding MyNews Holdings Bhd, we believe the new business in CU stores will be positive in the future with the growing popularity of the Korean theme among Malaysians coupled with its higher proportion of ready-to-eat options that generate higher margins. “
Compared to the F&B and retail segments, one analyst who declined to be named believes the poultry segment may experience lower growth due to the lack of major festivities by the end of the year. Given the challenges of dealing with the pandemic, he doesn’t expect much of a rise in consumer stocks just yet.
“In addition, the unfavorable ringgit and high raw material costs due to unprecedented demand (as developed countries recover from the pandemic faster) are putting pressure on profits. Profit visibility should be clearer by the end of the year.
When it comes to sin stocks, he favors the Carlsberg Malaysia Bhd brewery as it has operations in Singapore, which may benefit from a faster recovery of the country.
For investors with an eye on poultry players, another analyst prefers those with exposure to downstream businesses, such as CCK Consolidated Bhd (CCK stores) and Leong Hup International Bhd (The Baker’s Cottage).
She sees limited potential for the consumer sector – fashion in particular – as some players, including Padini Holdings Bhd, Bonia Corp Bhd and Parkson Holdings Bhd, rely heavily on physical sales.
“Also, I think their contribution to e-commerce could be smaller and more investment is needed for that. Additionally, higher operating costs could hold back business growth as they have to bear rental costs and wages despite slowing sales. “
His choices for the consumer sector are CCK, Kawan Food, Power Root Bhd, and QL Resources Bhd.
Here are some of the consumer stocks worth checking out:
Kawan Food Bhd
The frozen food maker’s net profit more than doubled to RM 27.7 million in 2020 from RM 12 million a year ago, thanks to higher sales income. For 1Q2021, its net profit was RM8.2 million, 23.9% more than RM 6.62 million in the same quarter a year ago.
Kawan Food operates in 37 countries around the world, using a range of distribution channels such as dealerships, direct sales to large account customers, e-commerce, and sales to retailers and wholesalers.
It produces a range of food products including paratha, spring rolls, pastry, frozen vegetables, chapati, finger foods, bakery and desserts, sold under five brands. Its two manufacturing plants are in Pulau Indah, Selangor and Nantong, China.
Last year, 56.3% of sales came from the international market while the domestic market accounted for 43.7%. Export earnings increased 13.3% to reach 128.4 million ringgit in 2020, but domestic sales growth more than doubled to 31.7% to reach 111.3 million ringgit.
Since the start of the year, Kawan Food’s share price has fallen 4.3%, closing at RM 1.97 last Thursday.
Mr DIY Group (M) Bhd
Mr DIY recorded a 113.5% jump in net profit to RM 124.79 million in 1Q2021, thanks to higher average monthly sales per store and a higher number of stores to 788 in 1Q2021 from 628 in 1Q2020.
In 2020, he made a net profit of RM 337 million compared to RM 318 million in 2019.
The group aims to open at least 100 Mr DIY, 25 Mr Toy and 50 Mr Dollar stores across the country this year. In 2020, it achieved its goal of opening a net total of 141 new stores.
At the end of December 2020, it held 34.6% of the retail home improvement market in Malaysia.
Listed in October 2020, the stock gained 23.1% since the start of this year to close at RM 3.82 last Thursday. Syifaa ‘has a target price of RM 4.79 for Mr DIY based on a price-earnings ratio 50 times higher than earnings per share in fiscal 2022.
“We believe the premium is justified to take into account the recent inclusion in the KLCI FBM which will improve the marketability and liquidity of Mr. DIY’s shares.”
As part of the recent lockdown, she understands that all Mr DIY stores are allowed to open except Mr Toy, which currently has 40 stores (around 5% of the group’s total stores).
“Despite the headwinds of Covid-19, we are impressed by the group’s resilience to maintain its growth trajectory with a sustained pace of store additions.
“In addition, with a greater focus on the Fourth Industrial Revolution (IR 4.0), we also welcome the group’s recent launch of a robotic warehouse in Seri Kembangan, capable of processing online purchases faster, resulting in a 200% increase in operational efficiency. Although still in its infancy, we believe this would provide a new avenue for growth as online shopping has become the new normal, led by the pandemic, ”she notes, adding that her online platform would be able to offer consumers the best of both. price and convenience.
Focus Point Holdings Bhd
Syifaa ‘sees optical sales as an essential purchase rather than a discretionary purchase, thus reinforcing Focus Point’s relatively MCO business model.
On the F&B segment of the business, she says: “The increased sales of the F&B company and the start-up of its second central kitchen should accelerate the profitability of the F&B division. We believe that the possibility of obtaining new F&B corporate clients is likely due to the popularity of its current product offerings. “
Its net profit in the first quarter jumped 76.8% to RM 3.2 million from RM 1.81 million a year ago, due to the better performance of the optics and related products business.
Last year, Focus Point achieved a net profit of RM 10.64 million compared to RM 9.89 million in 2019. Four new outlets were opened during the year while seven outlets under -performers have been consolidated.
The F&B business contributed 12% of its total turnover last year, with currently nine Komugi outlets. Its second central kitchen was installed last February to meet the increased demand for sales to F&B companies.
The group underlines that e-commerce for the optical activity has remained solid, as evidenced by a 45% growth in 2020 compared to 2019, supported by attractive promotions and effective digital marketing strategies to reach the consumer segment. target.
Since the start of this year, the Focus Point share price has gained 23.4%. Syifaa ‘has a box office’ buy ‘call, with a target price of RM 1.10. Its shares closed at 78 sen last Thursday.