SGX-listed stocks Thai Beverage (ThaiBev), Kimly, Food Empire and Sheng Siong Group will likely be the winners in a rising inflation climate, says RHB Group Research analyst Jarick Seet.
Sheng Siong Group and Kimly are both branded as value supermarkets and coffee shops, which will put them in good stead when there’s a drop in disposable income.
Food Empire and Thai Bev – for the most part – have also shown that they can raise prices easily when costs increase, to maintain margins or recover lost ones.
“[This is] partially due to the fact that, in ThaiBev’s case, as a brewery, it can always pass on costs as demand is relatively inelastic,” says Seet.
Meanwhile, counters such as UnUsUaL Group and DFI Retail Group may face a drop in demand once the reopening wave is over and a potential recession sets in. For UnUsUaL, less people may spend on concerts or live shows with the drop in disposable income, while the business of DFI Retail Group is more discretionary in nature, Seet points out.
Seet has kept “buy” on ThaiBev, Kimly, Food Empire and Sheng Siong with target prices of 97 cents, 46 cents, 95 cents and $1.78 respectively.
He has also maintained “neutral” on UnUsUaL and DFI with target prices of 14 cents and $2.71 respectively.
RHB is “overweight” on Singapore’s consumer sector
Seet’s report is part of a larger consumer sector report for the Asean region, where the team of analysts at RHB, including Singapore’s Seet, talks about the winners and losers in an inflationary environment.
Further to his report, Seet has kept his “overweight” call on the consumer products sector in Singapore.
On the counters amid the consumer sector, the RHB team believes investors should focus on and value companies with strong pricing power.
“Generally, inflation erodes consumer purchasing power – which, in turn, compels consumers to be more selective with their spending by prioritising the essential goods and/or down-trading to lower-priced alternatives to stretch their dollar,” the team writes.
“From the perspective of businesses, cost pass-throughs are never straightforward, as they have to balance between profitability and consumer demand, depending on market conditions, consumer sentiment, etc,” it adds.
At the same time, the ensuing hike in interest rates may slow the growth of companies with high gearing levels due to the earnings dilution and greater investment risks arising from elevated finance costs.
Meanwhile, a weaker home currency should “bode well” for the exporters under RHB’s coverage and boost tourism-related businesses, the team points out.
In their report, the team sees the US dollar (USD) remaining resilient against Asian currencies in the 2H2022 with “some modest depreciation” in the 2H2023.
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“On the flip side, food manufacturers will see higher cost of goods sold (COGS) – depending on the imported content of their raw material requirements,” the team adds.
Makers of products such as staple foods, addictive products and luxury items to benefit
To this end, the team is optimistic on the outlook of makers of staple foods, addictive products such as beer and cigarettes, as well as luxury items. These items, the analysts write, tend to enjoy relatively inelastic and resilient demand. The way they see it, makers of such products have greater pricing power and, hence, more stable profit margins when dealing with cost pressures.
In the same vein, prominent players with sizeable market shares within an industry can withstand cost pressures relatively better than smaller ones – considering the competitive advantage from greater economies of scale. Consequently, any price increases implemented by the market leaders are often followed suit by the rest of the industry, the analysts add.
As at 2pm, shares in ThaiBev, Kimly, Food Empire and Sheng Siong are trading at 63 cents, 35.5 cents, 51.5 cents and $1.60 respectively.