Consumer Goods 2016 Outlook - DBS Research 2015-12-17: Hopeful of a better 2016

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THAI BEVERAGE PUBLIC CO LTD Y92.SI  SHENG SIONG GROUP LTD OV8.SI  DAIRY FARM INT'L HOLDINGS LTD D01.SI  SUPER GROUP LTD S10.SI 

Consumer Goods 2016 Outlook - Hopeful of a better 2016 

• Possible rocky start to the year with uncertainties and potential kitchen-sinking 4Q15 results. 
• Advocate safer bets initially before looking to add /switch stocks as the year progresses. 
• Economic stimulus, stabilisation of regional currencies may drive 2H16 earnings recovery. 
• Stock picks: Thai Beverage (THBEV), Sheng Siong (SSG), Dairy Farm (DFI). 

Outlook 

 More misses than hits. 

• The recent results for the quarter ended Sept 2015 generally saw more earnings disappointment. 
• SUPER, F&N, OSIM and PETRA missed our forecasts, while SSG, THBEV and COURTS met our expectations. Regional consumer confidence remains soft, which led to lower sales and margins, yet companies (FNN, THBEV, SUPER) continue to invest in new capacities, marketing campaigns and products. However, economic stimulus measures in Indonesia, Malaysia and Thailand in 2016 may provide some reprieve. 
• We see stimulus permeating the economies in 1H16, before results kicking in from 2H16. Thus, we expect recovery if any to be back-end loaded. 

 Hopeful of a better 2016 on improvement in GDP growth. 

• As we enter 2016, we are marginally optimistic compared to 2015. We have projected an aggregate net profit growth of 7% in 2016 vs -3% in 2015. This is premised on our expectations that regional GDP growth will be better in 2016, volatility in regional currencies will ease, stimulus packages announced by authorities will come into effect, and 2015 will be “kitchen sunk” to derive a lower earnings base for companies to register growth. 
• Our economists’ regional 2016 GDP growth projections are on a gradual upward trend, signalling an economic improvement. 

 Bottom-up forecasts show a better 2016. 

• 2016’s growth rate for Singapore-listed consumer universe is in the range of - 5% to 9%. This is a more marginal growth trajectory after previous rounds of earnings disappointment and downward revisions. Based on our bottom up forecasts, we expect to see earnings turnaround for DELM, SUPER, PETRA, FNN and DFI. This is generally on the back of a dismal 2015 earnings and some slight positive on the macro front. 
• Our 2016 earnings growth range is largely in line with our economics desk’s ASEAN-5’s 2016 GDP forecasts of 2-6%. 

 Advocate safer strategy initially as start to the year could still be rocky. 

• We think the start of 2016 could still be rocky even as 
  1. the recent quarter’s (Sept end) results continued to see downward earnings revisions (-3%) on higher than expected costs, weaker regional currencies and slower than expected consumption; 
  2. we believe there could still be earnings risks for 4QCY15 (to be released around Feb/Mar- 16) as companies may try to “kitchen-sink”; and 
  3. the pace of potential Fed rate hikes may delay an immediate recovery. 
• We therefore advocate for a safer strategy in terms of stock picks. 

 Stable and safer plays. 

• We are initially adopting a more prudent stance before taking on a more “risk-on” approach. In Singapore, we like THBEV and SSG for their earnings resilience and visibility, and dividend yields. 
• We also have a BUY on DFI for its attractive valuations. But as the year progresses, we believe there should be opportunities to undertake a more “risk-on” approach. 
• We would monitor for signs of earnings recovery for SUPER as it is a key beneficiary of regional economic stimulus, with its extensive exposure to ASEAN markets. 

Valuation & Stock Picks 

 Earnings may bottom by 2H16. 

• Earnings disappointments have not done valuations any favour. While valuations are more attractive at 19x FY16F PE, down from 23x four months ago, lowered expectations could set a low base for subsequent recovery. Economic stimulus to spur demand could help support some initial recovery later next year. But for now, companies are navigating through tepid regional consumption. We prefer fundamentally stronger plays - SSG, THBEV, DFI over PETRA, OSIM, DELM, FNN, SUPER, DELM and COURTS. 

 Sheng Siong Group (SSG; BUY, TP S$1.01). 

• We like SSG for its earnings visibility and steady earnings profile. 3Q15 saw robust earnings growth of c.19% y-o-y, driven by higher revenue and margin expansion. Going forward, it will have a total of 39 stores by year-end, in line with our expectations. Margins should improve sequentially in 4Q15 post supply chain disruptions during the haze and less aggressive pricing post SG50 celebrations. We expect growth to be driven by margin expansion and addition to up to a total network of 50 stores. The stock pays a dividend yield of c.4%. 

 Thai Beverage (THBEV; BUY, TP S$0.82). 

• We believe THBEV is taking steps to transform into a regional beverage player. 
• In our view, we believe THBEV should have an advantage over its peers given its dominant position as the leading spirits player in Thailand, providing it with ample firepower and serving as a bastion for the company while it invests in new avenues of growth. 3Q15’s core operating profit showed resilience in our view even though it was down y-o-y in a slow quarter. Chang Beer was relaunched and Non-Alcoholic Beverage saw higher losses given that it is in an investment phase. 
• THBEV has a dominant position in the Thai spirits market, and has a wide repertoire in its brand portfolio, which we believe will continue to support earnings resilience in the near term. 

 Dairy Farm (DFI; BUY, TP US$7.34). 

• We have a BUY rating and SOTP-based TP of US$7.34. 
• The stock currently trades at an attractive valuation of 19x FY16F PE, representing -1.5 to - 1SD of its 7-year mean. We believe its share price correction since our downgrade in early August has been overdone and has priced in structural cost challenges as well as weaker margins going forward. 
• The current share price values DFI’s core business at under 18x PE. 

 Super Group (SUPER; HOLD, TP S$0.85). 

• We maintain our HOLD call for SUPER with a lower TP of S$0.85, pegged to 20x FY16F PE, in line with its average valuation over the last four years. 
• We believe earnings recovery momentum will be slow, led by weaker ASEAN economic growth. Consumer confidence is low particularly in Malaysia, Thailand and Indonesia. This will dampen growth prospects going forward. However, SUPER will be launching new products and we expect this to mitigate the full impact of slowing growth and consumption in ASEAN. 
• With improving macro prospects and its extensive exposure to ASEAN markets (Singapore, Malaysia, Myanmar, Thailand, Philippines), we look to turn positive with SUPER once we have ascertained signs that a more “risk on” approach is in place.

LIM Sue Lin DBS Vickers | http://www.dbsvickers.com/ 2015-12-17

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