Analysts most bearish on booze and tobacco

by **Cals** Mon 06 Jan 2014, 14:42

Business & Markets 2013

Written by Wei Lynn Tang of theedgemalaysia.com

Monday, 06 January 2014 10:31

KUALA LUMPUR: Analysts are most pessimistic on the outlook for booze and tobacco — both considered discretionary goods — due to weaker consumer spending brought on by a slew of price increases this year.

“Generally, discretionary consumer spending will be affected the most, not the staples. The [consumer] sector was already impacted last year, and this year we could see a prominent impact,” said Vincent Khoo, head of research at UOB KayHian Research.

The various cuts in subsidies on petrol, sugar and the hike of electricity tariffs, and the implementation of the goods and services tax (GST) in 2015 will undoubtedly have an impact on consumer spending. The question is, which segment of consumer goods will be squeezed the most?

“The breweries segment is expected to be most sensitive to demand in a year of inflationary pressures. When people hang out less and drink less beer, you would see a contraction in volume sales,” said Ian Wan, an analyst with Alliance Research.

That said, Wan noted although brewers’ revenue could be affected, they are known for their good cost control, hence they may not be hit as hard.

Share prices of Guinness Anchor Bhd and Carlsberg Brewery Malaysia Bhd have fallen by approximately 28% from their peaks in June last year.

“Despite their steep fall from the June 2013 peak, we think it is still too early to revisit brewery players due to rich valuations [at 20 to 25 times financial year 2014 (FY14) price-earnings ratio (PER)] and weak earnings growth driven by poor consumer sentiment,” said UOB KayHian in its report.

RHB Research Institute said it expects beer sales volume to stay depressed, even though the sector was again spared an excise duty hike in Budget 2014. It has a “sell” call on GAB and Carlsberg with target prices of RM15.19 and RM11.31, respectively.

CIMB Research acknowledged that while valuations for the brewery sector are stretched, share prices will be supported by the still-decent dividend yields of 4% to 5%. It has a “hold” call on GAB and Carlsberg, with target prices of RM16.40 and RM12.83, respectively.

GAB and Carlsberg closed at RM15.90 and RM12.24 last Friday.

Analysts also expect a decline in cigarette sales volume due to higher average selling prices (ASP).

“The cigarette consumption fall off reflects mostly smokers’ downtrading to contraband,” said Khoo of UOB KayHian.

Last September, an off-budget initiative of a 14% increase in excise duty saw cigarette prices [for a pack of 20] increase by RM1.50 to RM12.

CIMB Research expects the volume reduction in the premium segment — which accounts for more than 70% of British American Tobacco Bhd’s (BAT) revenue — to be milder as smokers in this segment tend to be less price sensitive.

While CIMB Research views that the value for money (VFM) volume should see a bigger plunge given its more price-sensitive consumers, UOB KayHian on the other hand foresees some downtrading from the premium cigarette segment to value brands.

BAT remained CIMB’s preferred pick with a target price of RM62, while JTI International Bhd remained UOB KayHian’s top pick with a target price of RM7.70 as it stands to benefit from the price hikes and potential downtrading by consumers to the VFM segment.

BAT and JTI closed at RM63.88 and RM6.60 respectively last Friday.

On the whole, research houses expect cigarettes total industry volume (TIV) to fall between 10% and 15%, however, they note that the impact on earnings from the multiple price increases will likely be offset by the anticipated drop in volume.

In the food and beverage (F&B) segment, research houses noted that consumer demand for essential items and basic necessities will remain resilient, with the only risk coming from fluctuations in commodity prices.

However, CIMB Research is “underweight” on this segment due to expensive PER valuations relative to the market. It has “reduce” calls on MSM Malaysia Holdings Bhd, Nestle (Malaysia) Bhd, and Fraser and Neave Holdings Bhd.

QL Resources Bhd remained a favourite for CIMB Research and RHB Research with target prices of RM5.09 and RM4.90 respectively.

Among the retail players, RHB Research liked Padini Holdings Bhd for its good dividend yield and aggressive store expansion, and has a buy call on it with a target price of RM1.95.

Padini paid a dividend per share of eight sen for FY13 ended June for a yield of 4.6% based on its closing share price of RM1.74.

An analyst, however, noted that the entrance of international clothing retailers like H&M and Uniqlo would have an impact on Padini’s sales.

RHB Research has a “neutral” stance on other retail players like AEON Co (M) Bhd, Amway Malaysia Holdings Bhd, Hai-O Enterprise Bhd, Bonia Corp Bhd, and Parkson Holdings Bhd.

Overall, analysts expect the consumer sector to be able to pull through this year, buoyed by stronger tourist arrivals in conjunction with Visit Malaysia Year 2014.

“Across the board you would see people consume less. It depends on companies to control the costs and their marketing campaigns to help their bottom lines,” said Wan from Alliance Research, who is not as pessimistic on the consumer sector compared to other sectors.

RHB Research however said it expects domestic consumer spending to remain resilient, buoyed by high savings, low unemployment and higher tourist arrivals.

Nevertheless, it is “neutral” on the sector in general due to rich valuations.

This article first appeared in The Edge Financial Daily, on January 06, 2014.