Clouded Outlook in Malaysia’s Consumer Sector

Report by UOB Kay Hian, dated 6th December 2024

Overview of the Consumer Sector

The Malaysian consumer sector is currently navigating a landscape filled with mixed signals. On one hand, a steep hike in minimum wages presents increased costs for businesses; on the other, stronger consumer spending driven by this very wage increase offers a silver lining. The sector anticipates earnings growth of 4.6% in 2024 and 8.9% in 2025. Despite challenges, such as the absence of major catalysts and potential underperformance relative to a broader market outlook, the sector maintains a MARKET WEIGHT stance. The top picks in this sector are F&N Holdings and Mr DIY, while Farm Fresh is recommended as a top sell due to its lofty valuation and expected steep competition.

Company-Specific Analyses

MyNews Holdings Berhad

MyNews is poised to tackle increased wage-related costs due to the minimum wage hike to RM1,700. Without any cost pass-through, the company’s earnings for 2025 could see a decline of up to 11%. A minor Average Selling Price (ASP) adjustment of 0.3% could help offset these costs. Despite these challenges, MyNews remains a key player due to its established market presence.

British American Tobacco (BAT) Malaysia

BAT Malaysia reported a notable 3Q24 performance, with results exceeding expectations. The company’s revenue grew by 14.5% year-on-year with a staggering 87.4% increase quarter-on-quarter. This robust performance is attributed to strategic pricing and cost management initiatives. Despite a HOLD recommendation, BAT remains a strong contender in the Malaysian market.

Carlsberg Brewery Malaysia

Carlsberg’s 3Q24 results were in line with expectations, showing a significant 19.8% growth year-on-year. The company’s strategic focus on marketing and distribution has paid off, contributing to its solid market standing. Carlsberg is recommended as a BUY, with future prospects looking promising amidst a stable market environment.

Farm Fresh Berhad

Farm Fresh stands out with a significant 114.8% increase in earnings year-on-year in 3Q24. However, the company faces challenges due to its high valuation and intense competition in the dairy sector. As a result, Farm Fresh is recommended as a SELL, with investors advised to be cautious of its future market positioning.

F&N Holdings Berhad

F&N’s 3Q24 performance reflected a decline, with earnings falling by 35.2% year-on-year. The company faced challenges due to frontloaded Advertising and Promotion (A&P) expenses, which are expected to reverse in subsequent quarters. Despite this, F&N is recommended as a top pick with a BUY rating, given its resilience and strategic market initiatives.

Heineken Malaysia Berhad

Heineken Malaysia’s 3Q24 results met expectations, with a 12.0% increase in earnings year-on-year. The company continues to leverage its strong brand and distribution channels to maintain market dominance. Heineken is recommended as a BUY, with a bright outlook supported by its robust operational strategies.

Mr DIY Group (M) Berhad

Mr DIY reported a slight decline in 3Q24 earnings by 1.6% year-on-year, influenced by increased operational costs. Despite this, the company remains a top pick with a BUY recommendation, given its expansive store network and appeal to the lower middle-income segment. Mr DIY’s strategic positioning makes it a formidable player in the consumer sector.

QL Resources Berhad

QL Resources delivered a stable performance in 3Q24, with earnings growing by 4.6% year-on-year. The company’s diversified portfolio and strategic investments in poultry and marine products have bolstered its market position. QL Resources is recommended as a HOLD, with steady growth anticipated in the coming quarters.

Nestle (Malaysia) Berhad

Nestle experienced a contraction in sales by 49.2% year-on-year in 3Q24, impacting overall sector sales. Despite this setback, Nestle remains a key player due to its strong brand and market presence. The company is recommended as a HOLD, with expectations of recovery as market conditions stabilize.

Sector Trends and Valuations

Overall, the consumer sector displayed muted sales growth in 3Q24, influenced by Nestle’s performance. However, major players like QL Resources, 99 Speedmart, and Mr DIY showed positive growth driven by strategic expansions and product offerings. The sector’s valuations are trading close to their five-year mean, emphasizing its defensive nature amidst broader market volatility.

The impending rationalization of petrol subsidies by the government is expected to save RM8 billion annually, potentially impacting the upper middle-income segment’s spending power. Despite these challenges, the sector remains resilient, supported by strategic initiatives and favorable economic conditions.