Diverse fortunes of consumer stocks

THE consumer sector, at least companies providing staple products, is on a roll.

Even after hitting a valuation of 40 times historical earnings following its listing three months ago, 99 Speed Mart Retail Holdings Bhd was given a “buy” call by CIMB Research earlier this week.

Oriental Kopi Holdings Bhd, a soon-to-be-listed cafe operator with only 20 outlets, finalised its initial public offering (IPO) price at 44 sen, giving it a valuation of 20 times historical earnings. Demand for its shares was strong as it was oversubscribed by 60 times.

Farm Fresh Bhd, which initially suffered some hiccups soon after its listing due to higher raw material prices, has since seen a boost to its earnings. The stock now trades at a historical price earnings (PE) ratio of 35 times.

And soon-to-be-listed Eco-Shop Marketing Bhd boasts 320 stores focusing on cheap staples premised on helping consumers stretch their ringgit with items mostly priced at a RM2.40 each.

Going by the performance of the sector, investor demand should be strong for Eco-Shop shares.

Conversely, companies in the consumer sector that sell discretionary items seem to be lagging. Fashion retailer Padini Holdings Bhd, saw its profits dip by 34% year-on-year (y-o-y) last year.

Padini continues to flag a “challenging” business environment, citing a deterioration in the purchasing power of consumers. Bonia Corp Bhd, a luxury fashion retailer, saw its profits drop by 40% y-o-y last year.

On a positive note, a few government initiatives are likely to leave consumers with more to spend.

One is the Employees Provident Fund (EPF) move to allow members to withdraw money from a newly introduced-account designed to meet members’ short-term financial needs. As at last September, five months into the programme, a whopping RM11bil had been taken out.

Then, there is the higher minimum wage, which will be raised to RM1,700 from RM1,500 by next month, while civil servants will get up to a 15% pay hike.

There are also the RM13bil proposed cash handouts under Budget 2025 – RM3bil more than the previous year.

Maybank Investment Bank (Maybank IB) Research has an optimistic view on the consumer sector. It acknowledges the pressure of higher utilities and labour costs but reckons that those costs will be manageable. Sector’s headwinds

Income increment, however, is still playing catch-up with escalating expenses.

“The increase in real wages might not help much, especially if essential goods inflate even higher,” notes fund manager Thomas Yong of Fortress Capital.

“High personal debt could also redirect additional income towards debt repayment,” he says.

There is also the rising cost of living issue. This stems from factors such as an expansion of sales tax on more items, rising utility bills and RON95 subsidy rationalisation plan.

Another indication of the rising cost of living is that people are saving less.

According to Mohammad Fairuz Mohd Radi of Affin Bank Bhd’s group community banking division, current account and savings account balances shrank in the first half of 2024.

“Although there was a slight recovery towards the second half of the year, it was still below 1%, indicating that people have to spend their savings to bear their cost of living,” he said at a recent panel discussion on the consumer sector hosted by CGS International in Kuala Lumpur.

Consumer companies face higher labour and raw material costs. Prices of commodities like cocoa, coffee beans, crude palm oil and tin rose significantly last year. And there is the impending minimum wage hike.

Will consumer companies pass on the rising costs?

Maybank IB Research reckons that the frequency of product price hikes will slow in 2025, and that these companies will take advantage of the improving consumer spending and sentiment to grow their sales instead.

While the outlook does seem brighter for consumer companies involved in staple products, there could be a silver lining for consumer discretionary stocks. This is in the form of the much anticipated tourism boom, fuelled by the upcoming Visit Malaysia Year 2026.

Apex Securities Bhd’s Chelsea Chew Xuan Ying notes that tourist numbers will be boosted by China and the development of the Johor-Singapore Special Economic Zone.

“Chinese tourists will still favour travelling to Malaysia, supported by the extension of the visa-free travel initiative,” she says. Nonetheless, foreign tourist arrivals have not been meeting expectations as the country continues to miss its targets. For the first 11 months of 2024, international tourist arrivals reached only 22.5 million, falling short of its full-year target of 27.3 million.

As of last August, Chinese tourist arrivals reached 2.3 million, below the five million targeted for 2024, a goal that is unchanged in 2025.

Fortress Capital’s Yong says the impact from continued shortfalls in tourist arrivals might be mitigated if domestic consumption remains strong or if there is a compensatory increase from other tourist demographics like India and the Middle East, where the average spending ticket size may be larger than that of tourists from China.

Apex Securities’ Chew adds that the implementation of the EPF Flexible Account (Account 3) may support discretionary spending.

“As of September 2024, nearly RM11bil had been withdrawn from EPF Account 3. Malaysia’s spending power in 3Q24 increased by 6.58% quarter-on- quarter. With EPF Account 3 implemented in May 2024, Malaysians have been opting for withdrawals, partly to spend on discretionary items,” she says.

Analysts’ top picks for the consumer sector include AEON Co (M) Bhd, MR DIY Group (M) Bhd, Farm Fresh, Spritzer Bhd, and 99 Speed Mart, premised on the relatively inelastic demand for staple products.

These counters are also viewed as beneficiaries of consumer downtrading activities amid a more cost-conscious market.

New and upcoming initial public offerings like Eco-Shop and A1 AK Koh Group, a pre-mix soup maker, will also add more vibrancy to the consumer space.

Malacca Securities’ research head Loui Low says it ultimately depends on the valuation whether the new listings can uplift sentiment in the consumer space.

“At this point, we are uncertain about the Eco-Shop’s PE ratio and market capitalisation. Nevertheless, we are intrigued by 99 Speed Mart’s success in the chain store concept, and we believe that Eco-Shop, operating within the same segment, has the potential to thrive as well,” he says.