Consumer Sector - RHB Research 2015-10-09: Value Fishing. Upgrade Singapore to Overweight

Consumer Sector - RHB Research 2015-10-09: Value Fishing. Upgrade Singapore to Overweight .SI 

Consumer Sector - Value Fishing. 

  • We remain cautious on overall consumption trends, and the negative impact from higher USD input cost on companies’ margins. 
  • We upgrade Singapore’s consumer sector to OVERWEIGHT, as we believe it is relatively more diversified and values may be emerging. 
  • We urge investors to take a longer-term view and pick up quality stocks at reasonable valuations. 

 China-led slowdown to continue hurting spending. 

  • China is a major trading partner to ASEAN and key importer of commodities. With the economic slowdown in the former turning more evident – coupled with the manufacturing Purchasing Managers’ Index (PMI) in contractionary territory for two consecutive months now – we expect this to have a major negative impact on ASEAN’s GDP growth and, consequently, household spending. 

 Weakening currencies’ impact on margins not fully played out yet. 

  • The impending rate hike in the US has put further pressure on ASEAN currencies. While our forex house view implies currency depreciation has largely played out, the negative impact on consumer companies would be hit hardest in 3Q15-4Q15. Higher USD costs are likely to become more evident as suppliers adjust and inventories deplete. 

 Upgrading Singapore to OVERWEIGHT, downgrading Indonesia to NEUTRAL. 

  • Indonesia’s government securities have the highest foreign holdings. At the same time, the country also has the largest percentage of exports to China, making its economy most vulnerable to these two factors. We think Singapore consumer companies are more diversified and value may be emerging. We remain UNDERWEIGHT on Malaysia due to a perfect storm of headwinds, including goods and services tax (GST) implementation and political uncertainty. 

 Stress testing companies. 

  • We stress tested consumer companies under our coverage that are most vulnerable to: 
    1. an increase in interest rates, and 
    2. higher USD input costs. 
  • Our results show that balance sheets are very robust due to a high percentage of longer-tenure fixed domestic debt. Higher USD input, however, presents a significant risk to many firms. 

 Continue to prefer staples

  • Continue to prefer staples, with our Top Picks being Sheng Siong, BreadTalk, Nippon Indosari Corporindo (Nippon Indosari), Matahari Putra Prima, SSI and China Mengniu Dairy (China Mengniu). We continue to remain cautious on overall consumption trends in ASEAN and Hong Kong, and prefer companies with more resilient businesses.

Country Sector Ratings - Singapore 

  • Upgrading to OVERWEIGHT. The sector has sold off significantly and we believe there is some value emerging in selected counters. Compared to their ASEAN peers, many Singapore consumer companies are more diversified geographically and have strong balance sheets. This reduces risks significantly. 
  • We also expect the SGD to hold up relatively better against the USD. This, therefore, favours companies with higher domestic exposure. Discretionary spending is expected to remain weak in light of the economic uncertainty. 
  • Staple spending, however, is likely to remain resilient as Singaporean households are among the wealthiest in the world. 
  • Potential catalysts are: 
    1. a loosening of foreign talent policies that would bring in more dollar spend as well as reduce companies’ manpower costs, and 
    2. the fitting of some property cooling measures that may increase household wealth and stimulate more discretionary spending. 
    Household debt to GDP in Singapore is at record levels, but these are mostly related to property assets. 
  • A key risk is a further sell-down in regional currencies against the USD, which would hurt companies with regional earnings.

Our Top Picks

BreadTalk (BREAD SP, BUY, TP: SGD1.90) 

Room for margins improvement. 

  • BreadTalk has built a regional footprint of more than 800 stores in Asia over the past decade. We believe there is significant room for margins improvement as depreciation/start-up expenses moderate going forward. In particular, the company’s restaurant division is expected to outperform, given the enduring popularity of the Din Tai Fung chain in Singapore. 
  • Over the medium term, we also think BreadTalk may be a potential M&A target. 


  • We believe the stock is significantly undervalued, trading at FY16F EV/EBITDA of less than 5x. Our TP of SGD1.90 is based on 7.5x FY16F EV/EBITDA, which is still a significant discount to peers. 

Potential catalysts. 

  • Steady margins improvement ought to increase confidence in management’s medium-term plans and may trigger a re-rating. 

Key Risk.

  • A key risk is a slowdown in China, where there is a reduction of footfall in Tier-1 shopping malls. This may negatively impact BreadTalk’s business there. The East Asian nation accounts for around 30% of the company’s revenue currently. 

Sheng Siong (SSG SP, BUY, TP: SGD0.97) 

Most efficient supermarket operator in ASEAN. 

  • The company has consistently achieved one of the highest gross margins for a supermarket operator in the region. We expect Sheng Siong’s relentless cost efficiency drive to continue, with self-checkout counters being one of the new initiatives. 
  • The company has historically outperformed during poor economic conditions, as consumers down-trade to better value proposition for groceries. 


  • Sheng Siong is currently trading at 20x FY16F, in line with its ASEAN peers. Our DCF-derived TP of SGD0.97 implies 23x FY16F. We believe a dividend yield of 4% is sustainable. 

Potential catalyst. 

  • YTD, the company has added four new stores. We believe that management may be on track to achieving further additions, which may boost growth visibility. 

Key risk. 

  • Most of Sheng Siong’s stores are mature, with only one new store added in 2013-2014. This may dampen same-store sales growth (SSSG) for the year.

James Koh RHB Securities | http://www.rhbgroub.com/ 2015-10-09
RHB Securities SGX Stock Analyst Report BUY Maintain BUY 1.90 Same 1.90
BUY Maintain BUY 0.97 Same 0.97