2Q15 report card — a washout quarter for retailers on soft consumer spending

by **Cals** Mon 07 Sep 2015, 22:18

2Q15 report card — a washout quarter for retailers on soft consumer spending

By UOB Kay Hian / digitaledge Daily | September 7, 2015 : 10:29 AM MYT

Consumer sector
Food and beverage (F&B) players’ results are in line with expectations. Meanwhile, the second quarter of 2015 (2Q15) was a washout quarter for retailers who were impacted by weak consumer sentiment post implementation of the goods and services tax (GST).

We maintain “market weight” on the sector due to: i) lofty valuations with limited earnings growth despite the recent market selldown; and ii) earnings risk from weaker-than-expected consumer spending.

We like [size=16]Guinness Anchor Bhd ([You must be registered and logged in to see this image.] Valuation: 1.70, Fundamental: 2.30) and Carlsberg Brewery Malaysia Bhd ( Valuation: 1.50, Fundamental: 1.30) for their defensive attributes, coupled with attractive financial year 2016 forecast (FY16F) yields of 5.4% to 6.3%.

There were no earnings surprises for the consumer stocks under our coverage.

The F&B players recorded a single-digit year-on-year (y-o-y) decline in 2Q15 sales volume, which was attributed to the front-loading in 1Q15 and modest impact from the softening of consumer spending post-GST.

However, earnings before interest and tax were up by 1% to 15%, driven by margin expansion (versus 2Q14) from easing commodity prices, strong cost control and better showing in the export markets (for Carlsberg).

2Q15 was a washout quarter for retailers due to the softening of consumer spending from the implementation of the GST on April 1.

Aeon Co (M) Bhd ([You must be registered and logged in to see this image.] Financial Dashboard) recorded a whopping 52.2% y-o-y drop in 2QFY15 net profit, while Parkson Holdings Bhd ( Valuation: 1.10, Fundamental: 1.35) dipped into the red in 2QFY15, on the back of a decline in sales, coupled with pressure on operating costs.

However, we note that Padini Holdings Bhd ([You must be registered and logged in to see this image.] Valuation: 1.50, Fundamental: 2.80) recorded a modest single-digit y-o-y earnings growth after normalising its other income and effective tax rates, driven by higher sales particularly from its Brands Outlets, reflecting down-trading by consumers.

We believe sales will still be soft in 3Q15, and a strong recovery could only be seen in 4Q15, on the back of normalisation of consumer spending.

We reiterate our view that F&B companies will be resilient amid the softening of consumer spending, while non-food retailers will suffer a more significant impact as consumers are likely to cut spending on discretionary items.

In addition, retailers will likely face margin squeeze due to higher discounts to drive sales, as well as the absorption of any increase in costs from a potential hike in operating costs, particularly personnel and rental rates.

We maintain “market weight” on the sector due to: i) still-lofty valuations with limited earnings growth despite the recent market selldown; and ii) earnings risk from weaker-than-expected consumer spending.

We suggest investors to accumulate fundamentally robust F&B stocks due to their defensive attributes amid market uncertainty. Our top picks are Carlsberg and Guinness for their undemanding valuations after the recent selldown, coupled with attractive yields.

An integrated manufacturer and distributor of fast-moving consumer goods (FMCG), Yee Lee Corp Bhd ([You must be registered and logged in to see this image.] Valuation: 1.40, Fundamental: 1.00) is one of the most compelling consumer names.

According to a media report, the recent roll-out of its Red Bull energy drinks could lift earnings by 30% to 40% in FY16.

Following a 34% fall from its year-to-date peak, the company is trading at an undemanding annualised FY15F price-earnings ratio (PER) of 10.8 times, which is lower than that of its larger FMCG peers, such as DKSH Holdings (M) Bhd([You must be registered and logged in to see this image.] Financial Dashboard)’s and Fraser & Neave Holdings Bhd’s FY15F PERs of 13.5 times and 22.1 times respectively. — UOB Kay Hian, Sept 4

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This article first appeared in digitaledge Daily, on September 7, 2015.
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