SINGAPORE (10 June): ASEAN consumer staple markets have been hard hit by the Covid-19 pandemic so far, with analysts expecting 2Q20 to be a particularly difficult time for investors. Yet, with regional restrictions set to gradually loosen, 2H20 is expected to be a period of recovery for these businesses should the region avoid a second wave of Covid-19 

“Due to COVID-19, we have cut our FY20 earnings by 6%. Our key earnings cuts were largely on lower assumptions on sales and margins,” say a team of DBS analysts led by Alfie Yeo and Andy Sim. Despite these cuts in earnings, the sector is set to remain resilient as the essential nature of consumer staples has seen firms less affected by lockdown measures. Earnings growth is expected to remain resilient (albeit muted) at 2% for FY20 and 11% for FY21. 

The team expects a gradual recovery that takes place in phases, with through and end demand hopefully pick-up as F&B outlets begin to reopen as operations normalise post-lockdown even though some social distancing measures may remain. Recovery is expected to take place in FY21 as overall consumption demand returns to some semblance of normalcy. Companies most affected by COVID-19 will see the fastest demand recovery. 

The resilient Singapore market serves as a proxy for regional recovery due to its openness to regional markets, with branded food manufacturers seeing more resilience both operationally and flow through to earnings. Food manufacturers, say the analysts, have not been unduly affected by the pandemic even as they cut earning expectations of local businesses by up to 17% on the back of reduced F&B outlet demand and production cuts across Southeast Asia.

Regional supply chain disruption is expected to disproportionately affect Singapore due to its economic openness, with regional countries imposing restrictions on businesses. While such disruption is likely to be minor due to quick resolution of the implementation of these restrictions early on, firms may need to find alternative suppliers upstream as suppliers cut production levels in response to the pandemic. Singapore has already sourced new suppliers for some staple food products, sourcing eggs from Poland and shrimp from Saudi Arabia.  

“While upstream consumer companies continue operating, end demand recovery could take time as consumers and businesses take time to adapt to a new consumption and business environment post COVID-19. As growth strategies remain largely intact, growth rates could moderate on more cautious consumption,” remark the analysts. 

Thailand has seen downstream F&B operations badly affected as reduced footfall from tourists and shoppers due to travel restrictions and lockdown measures take their toll. Upstream and midstream operators outperformed downstream businesses in 1Q20, as household demand for such items stabilise revenues higher up the supply chain. Discretionary spending on non-essentials like snacks and drinks have fallen due to weakened consumer confidence. 

Considering this uncertainty, analysts continue to favour counters with smaller exposure to downstream F&B services. They expect a U-shaped rather than V-shaped recovery, with F&B services likely to be below full capacity for the foreseeable future and tourism demand absent, with travel restrictions only reopening from June 2020 at latest. A weak economy without clear catalysts is also likely to contribute to weaker demand in F&B. 

With consumption driven by domestic lower-middle class demand that is reliant on government subsidies, Indonesia has experienced weakened consumption-led demand. Consumer confidence in Indonesia is also weak, with the Consumer Confidence Index (CCI) dropping below the confidence level of 100 to 84.8 in April 2020 from 113.8 in March 2020. March 2020 also saw an approximately 4.5% y-o-y reduction in retail sales, with all segments except food beverages and tobacco (which grew by 3.7%) experiencing negative growth. 

On the bright side, consumer expectations remain positive for the next six months with a CCI of 106.8; the government has also introduced an INR 405 trillion ($39.8 billion) stimulus package to help the poor through social safety nets, food aid and cash subsidies to boost consumer demand. Yet rupiah depreciation and higher input prices are likely to lead to margin weakness in Indonesia despite softening commodity prices, with the DBS team cutting  FY20F earnings for most consumer staples companies by around 3-7%. 

Top stock picks for this sector are SGX-listed Thai Beverage (THBEV) and JAPFA and Thai-listed Charoen Pokphand Foods (CPF), all of which are trading below historical average and 20 times forward Price-to-earnings (PE) valuations. “We believe these stocks will see sales volumes improving on higher consumption of alcohol and meat products,” say the analysts, who have also named IDX-listed Indofood Sukses Makmur (INDF) as a defensive pick for resilient earnings, a high dividend yield of more than 4% and attractive 40% upside. 

The analysts have given Thai Beverage, Japfa, and Charoen Pokphand Foods "buy" calls with target prices of 90 cents, 86 cents, and THB 41 (S$1.82), respectively.

As at 4.11pm, shares in Thai Beverage are changing hands 0.7% up at 72.5 cents. Shares in Japfa are trading flat at 67.5 cents.