Consumer Sector - OCBC Investment 2015-11-24: Look for consistency given soft retail scene

Consumer Sector - OCBC Investment 2015-11-24: Look for consistency given soft retail scene SHENG SIONG GROUP LTD OV8.SI  QAF LTD Q01.SI  THAI BEVERAGE PUBLIC CO LTD Y92.SI 

Consumer Sector: Look for consistency given soft retail scene 

 Mixed performance within coverage 
 Some support from government reforms 
 Preferred picks offer decent yields 

Weakness could persist for some 

  • Stocks under our coverage for the consumer sector posted a mixed bag of results for the year. It is now all too familiar that the regional economic conditions have been challenging, and the retail environment across the markets has been muted as well. 
  • Unfavourable exchange rates relative to the reporting currency also affected earnings to some extent. Given this, we observed that companies focused on cutting costs, and/or continued expansion of new outlets. Yet operating expenses can only be cut to a certain degree. 
  • In addition to a weaker topline, this often resulted in a prolonged period of unimpressive bottom-line performance for some companies (BreadTalk, OSIM, Petra Foods). 

Higher GDP growth rate expected for Thailand and Indonesia 

  • On the macro front, OCBC Treasury Research expects a better GDP growth rate for Thailand next year, underpinned by accelerated public spending and tourism. 
  • While Indonesia’s pace of infrastructure spending was underwhelming this year, growth looks to be turning around slowly, thus we may also turn more positive if Petra Foods is able to achieve underlying sales growth. 
  • As China transforms itself into a consumption-based economy, China has unfortunately been a drag for sales at BreadTalk and OSIM, while Capitaland China Retail Trust provided a case of healthy shopper traffic and tenant sales. We do not see clear company-specific drivers for a pickup in topline here at the moment. 
  • Back in Singapore, sentiment has been muted and retail sales have been bumpy. Retailers might not be able to pass on all of the increment in operating costs to consumers, thus tapping on government help for productivity initiatives could help alleviate some of the pressure. 

Maintain NEUTRAL 

  • We are keeping our NEUTRAL call for the consumer sector, as we believe certain companies are able to continue riding out the soft retail environment, while others may still see their earnings suppressed by weak demand. 
  • We believe our preferred picks, Sheng Siong [BUY, S$0.95], QAF [BUY, S$1.27], and Thai Bev [BUY, S$0.83], exemplify consistency as they continue to maintain their market share with good sales execution, and operating margins have stayed within expectations. 
  • While consumption in Singapore seems flattish, SSG’s new stores should support sales growth. QAF’s bakery operations offer some resilience for its topline, while we still believe Thai Bev’s alcoholic portfolio (Spirits and Beer) is quite defensive based on historical analysis in our previous reports. 
  • In addition, we like that these three stocks have been giving decent dividends, with expected dividend yields of about 4-5%.

Jodie Foo OCBC Securities | http://www.ocbcresearch.com/ 2015-11-24
OCBC Securities SGX Stock Analyst Report BUY Maintain BUY 0.95 Same 0.95
BUY Maintain BUY 1.27 Same 1.27
BUY Maintain BUY 0.83 Same 0.83