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16 February 2023. Thursday
KUALA LUMPUR (Feb 16): Limited consumer discretionary spending power in 2023 is anticipated to impact the consumer discretionary subsector, against the backdrop of the return of tourists and lower input costs, according to CGS-CIMB.
In a note on Thursday (Feb 16), the research house said high inflationary pressures and the interest rate upcycle may lead to slower consumption patterns towards big-ticket discretionary items.
“That said, Retail Group Malaysia (RGM) forecasts Malaysia’s retail sales to grow by 3.5% year-on-year (y-o-y) in 2023 (normalised growth trend) on expectations of further economic recovery and higher tourist arrivals,” it said.
CGS-CIMB said it likewise sees a gradual return of foreign tourists in 2023, especially tourists from China on the back of the nation’s reopening, which is expected to lead to higher footfall for retailers.
In particular, the research house noted this could bode well for retailers’ sales with overseas operations, namely Bonia Corp Bhd, InNature Bhd, MR DIY Group (M) Bhd, MyNews Holdings Bhd, 7-Eleven Malaysia Holdings Bhd and QL Resources Bhd.
“We estimate that foreign tourists’ spending contributed up to 5% to 15% of total sales pre-pandemic for the above-mentioned companies,” it said.
Touching on another boon for the consumer discretionary subsector, the research house noted that with the normalisation of supply-demand dynamics, input costs are expected to ease gradually in 2023 on lower material prices, lower freight charges and a stronger ringgit.
“Coupled with reflection of price hikes by certain retailers since 2022, we believe gross profit margins could improve (up one to three percentage points on average) in 2023,” CGS-CIMB analysts Khoo Zhen Ye and Walter Aw said, but noted this could be offset by higher operating expenses due to the higher minimum wage, labour shortages, rising utilities costs and aggressive expansion drive.
CGS-CIMB reiterated its “neutral” call on the consumer discretionary subsector as it believes consumers may downtrade and spend less on discretionary items, leading the subsector to trade closer to its five-year historical mean.
“The discretionary subsector (excluding MR DIY) is currently trading at 17.2 times one-year forward price-to-earnings ratio (PER), only slightly above the sector’s five-year mean of 16.8 times,” it said
CGS-CIMB listed Bonia (add, target price or TP: RM3), InNature (add, TP: 80 sen), MyNews (add, TP: 83 sen) and MR DIY (add, TP: RM2.40) as its picks for the subsector.
“We believe MR DIY deserves to trade at a premium to other discretionary names, given its status as a value retailer,” Khoo and Aw said, adding that they view the stock as a proxy to consumer downtrading activities amid a high inflation environment.
“For InNature, we believe the stock is primed to benefit from the recovery in tourist arrivals (15% of sales were from foreign tourists pre-pandemic), while MyNews should see improved profitability from its business turnaround activities,” it said.
As for Bonia, CGS-CIMB said it likes the stock for strong brand equity, strong growth prospects with three-year earnings per share compound annual growth rate of 18%, healthy balance sheet with a net cash position of RM39.3 million, and attractive dividend yield of close to 7% for FY2023-2025.
