Consumer Sector - OCBC Investment 2016-11-29: Adapting In The Face Of Stronger Competition

Consumer Sector - OCBC Investment 2016-11-29: Adapting In The Face Of Stronger Competition Consumer Sector

Consumer Sector - Adapting In The Face Of Stronger Competition

  • Mixed macro outlook across region.
  • Stronger competition from existing and new entrants.
  • Sheng Siong Group our preferred pick.



Previous preferred picks have done well 

  • The FTSE Consumer Goods (FSTCG) Index outperformed the benchmark STI, with returns of 23.2% from FSTCG vs. -3.7% from FTSE Consumer Services (FSTCS) and the FSSTI of -1% YTD (as of 25 Nov). 
  • FSTCG’s returns were likely due to the rally from Thai Beverage and several commodity stocks. 
  • Our preferred picks (Sheng Siong Group, Thai Beverage, QAF) from our Nov 2015 sector report largely displayed good earnings growth and also outperformed the benchmark with YTD share price returns of 23%, 29% and 25% respectively.


A year of privatizations and acquisitions 

  • The consumer sector in particular saw a series of privatisations and acquisitions, suggesting valuations have been generally reasonable. 
  • Over the years, the FSTCG Index forward PER levels has been largely trading around its five-year historical average, as is the case for the MSCI AC ASIA Consumer Staples Index. 
  • While sound long term growth fundamentals remain intact for the region, particularly for Asia emerging markets, near term outlook has been clouded by uncertainties arising from the region itself (Philippines and Thailand for instance) as well as on a global scale.


Emphasis on innovation and productivity measures continues 

  • As the local retail and F&B industries face persistent challenges such as manpower shortages and increased competition, the government has outlined various strategic roadmaps with emphasis on innovation and productivity measures. 
  • Notably, the aim is to also increase the e- commerce share of total retail receipts from 3% currently to 10% by 2020. We note that strategies by companies under our coverage mirror these key factors as well. 
  • As the growth of e-commerce here likely continues to shape the competitive scene for several sub-sectors of the local retail scene, we believe that e-commerce is still in the early stages here as we understand that Singapore poses unique challenges due to its retail landscape and small market size as compared to other countries, proving further difficulties in resource optimisation for companies to meet e-commerce associated demand and expectations.


Staying neutral on the broader sector 

  • With a mixed macro outlook across the region and competition expected to increase especially for traditional consumer players, we are keeping our NEUTRAL stance on the consumer sector. 
  • At this juncture, we are leaning towards Sheng Siong Group [BUY, S$1.15] as our preferred pick for its defensive and cash generative business, decent dividends, and management execution strength. 
  • Despite stronger competition in the local grocery industry arising from existing and new entrants, we believe that the group can sustain growth ahead in the near to medium term on the back of their differentiated value positioning in the market.




Jodie Foo OCBC Investment | http://www.ocbcresearch.com/ 2016-11-29
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 1.150 Same 1.150






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