Consumer Sector - OCBC Investment 2016-01-08: Opportunities remain amid current air of nervousness

SHENG SIONG GROUP LTD OV8.SI QAF LTD Q01.SI THAI BEVERAGE PUBLIC CO LTD Y92.SI

Consumer Sector: Opportunities remain amid current air of nervousness

 Modest macro figures

 Still have room for downside for some co

 Sticking to our preferred picks

This year had started on a fairly bleak note, with the STI down ~4% over the last four trading days, while the consumer indices, FTSE Consumer Goods (FSTCG) and FTSE Consumer Services (FSTCS) were equally unexciting with declines of 2.1% and 3.0% respectively.

Following our last report on the sector in Nov, we take note of the recent data indications of macro conditions of selected countries relevant to stocks under our coverage.
The latest World Bank forecasts released on Wed revealed continued fears over developing economies including China.
Earlier in the week, China’s Caixin manufacturing PMI print came out weaker than expected, but as the country transitions towards a service and consumption driven economy, we believe retail sales in China remain the bright spot. With that, high gestation costs continue to drag on profits for companies like BreadTalk and OSIM.
Back in Singapore, the flash 4Q15 GDP growth estimates for Singapore came in above expectations. However, overall GDP growth is at its slowest pace in six years, and the outlook seems uninspiring with our Treasury Research & Strategy Team expecting GDP growth for 2016 to remain in the range of 2-3%.
For retailers, the pass-on of high labour costs to consumers will be limited, thus we expect to hear of more productivity initiatives that are aimed to alleviate cost pressures.

Our Treasury Research team also believes in a better outlook for private consumption in Indonesia, which may translate to better times for Petra Foods’ sales in their core market.
While issues such as currency weakness persist, a certain degree of rate cuts by the central bank is expected to help.

Elsewhere in the macro scene, we think the China-Australia Free Trade Agreement (ChAFTA) is worth noting, especially for QAF, who owns one of the largest integrated pork production businesses in Australia.
The ChAFTA entered into force on 20 Dec-15, and the planned tariff reductions bode well for the Australian red meat and livestock industry.
For pork in particular, there are plans to eliminate the tariffs of up to 20% within four years. This gradual removal of costs could encourage an increase in pork exports to China, where demand for imported pork is reportedly increasing, thus potentially impacting the profitability of meat producers and exporters positively.

Given the mixed outlook for our consumer stocks, we keep a NEUTRAL stance on the sector, and believe our picks in the sector exemplify stability and are able to ride out the gloomy sentiment.
We like Sheng Siong Group [BUY, FV: S$0.95], QAF [BUY, FV: S$1.27] and Thai Beverage [BUY, FV: S$0.83].

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