Switch to value stocks holds investor potential

PETALING JAYA: There could be further upside for investors in value-for-money retailing brands and consumer staples amid frequent bargain hunting in the current economic environment, analysts say.

According to BIMB Research, the consumer discretionary segment is being supported by resilient domestic consumption of basic necessities, cash assistance and higher tourist arrivals.

The research house noted that cautious consumer sentiment is expected to benefit value-for-money retailers as consumers are expected to move away from premium items.

“We remain bullish on the consumer sector and maintain an ‘overweight’ call with seven stocks under coverage having a “buy” call. Our top picks are Farm Fresh Bhd with a target price of RM2.45, and Mr DIY Group (M) Bhd with a target price of RM2.40,” the research house said.

Nevertheless, BIMB Research said it remains cautious on any implementation risks associated with subsidy rationalisation on RON95 petrol, the impact of a broader sales and service tax, and ongoing geopolitical tensions that could weaken consumer sentiment.

Moreover, the research house said it anticipates a slower third quarter, particularly in the discretionary segment, given the absence of festive-driven spending.

The recent second quarter results season for the 12 companies under its coverage delivered a mixed performance, BIMB Research said.

“Five companies recorded results in line with our expectations, five came in below, while two, Spritzer Bhd and PETRONAS Dagangan Bhd (PetDag), exceeded projections. Farm Fresh stood out as the star performer, with its most recent quarterly earnings surging by 26.2% year-on-year (y-o-y),” the research house said.

Farm Fresh was mainly driven by higher sales for new products, including ice cream and powder-format products and their lower input costs with larger margin contributions from the new products.

Spritzer and PetDag, came in above expectations in the first half of the year after achieving 58% and 59% of full-year forecasts, respectively, BIMB Research said.

Spritzer’s performance was due to higher volumes and average selling prices, while PetDag was driven by stronger sales volume in the commercial segment.

However, five stocks under its coverage came in below expectations: MSM Malaysia Holdings Bhd, Dutch Lady Milk Industries Bhd, Amway (M) Holdings Bhd and Padini Holdings Bhd.

It noted MSM was the worst performer, with first half earnings declining 73.7% in the year to date, impacted by lower average selling prices that were pressured by Thai sugar dumping.

“Under our coverage, consumer staples recorded a weighted average net profit increase of 5.3% y-o-y growth. Meanwhile, consumer discretionary recorded a decrease of 4.6% y-o-y.”

“This is in line with Retail Group Malaysia’s forecast of weak second quarter spending and a decline of 1% y-o-y.

“The decline largely stems from weaker demand for big-ticket and premium discretionary items, as first quarter data showed resilient growth in smaller-ticket segments such as fashion and convenience stores,” the research house said.

“This is in line with our expectations of a preference for value-for-money items in the discretionary segment such as Mr DIY and Aeon Co (M) Bhd, and bearish outlook on premium and big-ticket items such as Amway,” BIMB Research added.