CFA Society Singapore
SINGAPORE (Apr 5): RHB Research is maintaining its sector “overweight” on consumer stocks although it cautions of benign consumer sentiment for 2019, with Singaporeans expected to spend more prudently amid an uncertain macroeconomic outlook.
In the research house’s view, consumer confidence peaked early last year due to improved wealth effect and strong GDP growth towards end-2017; it believes GDP growth will moderate this year while the property market decelerates.
Nonetheless, it continues to see “pockets of opportunities” in companies with strong attributes and a bottom-up growth story.
Sheng Siong is RHB’s top “buy” pick in the retail sub-sector with a target price of $1.25.
At the same time, Delfi and Thai Beverage (ThaiBev) are highlighted for their market exposure to overseas markets in Indonesia and Thailand, respectively, and have been given target prices of $1.68 and 92 cents.
“As tailwinds from buoyant GDP growth and wealth effects from financial markets and property prices diminished, growing within Singapore’s domestic market is going to be more challenging this year,” says analyst Juliana Cai in a report on Friday.
“Valuations are still reasonable, since most of the consumer names under our coverage are trading below their 5-year historical average P/Es. A more positive macroeconomic outlook could lift overall sentiment and the sector’s valuation,” she adds.
Cai prefers Sheng Siong as the group recently opened 10 new stores in 2018, which should see revenue maturing this year to offset higher fixed costs, in her view.
“We believe Sheng Siong has more to offer [than Dairy Farm] in terms of organic growth... Sheng Siong is also unlikely to face severe labour crunch issues over the next two years as it will be rolling out hybrid payment machines in the remaining 30% of its stores, which should help to reduce manpower reliance,” she comments.
The analyst also likes Delfi for its increasing focus on growing its premium and higher-value product range following its portfolio downsize, and thinks it is well-positioned to leverage on the rising middle-class and higher purchasing power in Indonesia, on top of the stabilising of IDR versus USD this year.
She forecasts 19% growth in FY19F earnings for the confectionery player, and foresees strong revenue growth and improving operating leverage as fixed costs have stabilised.
While Cai sees a possibility of slower y-o-y growth in 2Q19 earnings for ThaiBev’s spirits volumes, she believes there is some upside to its share price due to near-term alcohol demand recovery from 2018, which should come on the back of improving farm income.
“According to Thailand Office of Industrial Statistics, beer production for Jan-Feb 2019 increased by 5.2% YoY. We expect demand for Thaibev products to grow at a similar rate to its industry production figures… Additional stimulus packages after the new Cabinet is established should help to drive further improvement in domestic consumption,” she adds.
As at 11:55am, shares in Sheng Siong, Delfi and ThaiBev are trading at $1.04, $1.30 and 83 cents, respectively.