Consumer Sector - RHB Invest 2017-01-03: Finding Opportunities In The Low-Growth Era

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Consumer Sector 2017 Outlook BREADTALK GROUP LIMITED 5DA.SI DELFI LIMITED P34.SI DAIRY FARM INT'L HOLDINGS LTD D01.SI NEO GROUP LIMITED 5UJ.SI SHENG SIONG GROUP LTD OV8.SI

Consumer - Finding Opportunities In The Low-Growth Era

• We believe consumer staples would still be at the forefront of attention in 2017. Discretionary spending is likely to remain cautious, as consumer sentiment in Singapore still faces headwinds from muted economic conditions. 
• In view of the lacklustre macro-economy, we believe effective cost reduction initiatives and operational efficiencies would be the key differentiating factors, rather than topline growth. 
• Maintain OVERWEIGHT, as most of our covered stocks in this sector are in the consumer staple space. Top Picks are BreadTalk, Dairy Farm and Sheng Siong.

Favour operational efficiencies over topline growth. 

• We are more partial towards consumer companies that have consistently invested in productivity improvement. BreadTalk and Sheng Siong, for instance, were able to reap higher operating margins over the last five years despite muted demand and tightening foreign labour policies. Dairy Farm, on the other hand, has significant room for margin improvements, as it plans to roll out fresh food distribution centres for its hypermarket and supermarket segments across all markets. We are confident that these companies can continue to deliver solid performances from tighter cost controls in 2017.

Stronger foothold by consumer staples. 

• Given the difficult economic conditions, we believe concerns over job security and stagnant wages would persist and weigh down on discretionary purchases in 2017. Meanwhile, consumer companies would also continue to face disruptions from the e- commerce trend. 
• We believe spending on staples would be least impacted, with the high personal savings rate in Singapore. Thus, we prefer companies in the food and beverage (F&B) space (BreadTalk) and grocery retailing (Dairy Farm and Sheng Siong) since they are less vulnerable to a decline in consumer sentiment as well as to online competition. 
• Coincidentally, these are also the companies that we believe could reap higher profitability from improved operational efficiencies in 2017.

Potential catalysts for demand growth in the region. 

• Most of the Singapore-listed consumer companies have exposure to the regional markets, in particular, ASEAN. 
• Malaysia is due to hold its general election soon, and its government has revealed a generous budget to aid low-income families. 
• The Thai Government has also dished out tax rebates on spending up to THB30,000 for Dec 2016. We believe these schemes would potentially help to boost domestic consumption and consumer confidence for 2017. 
• In Indonesia, the tax amnesty bill, which came into effect in mid-2016, has boosted the country’s tax revenue. We believe the Government would have more capacity to spend on more social programmes to increase consumer consumption in 2017, too.

Maintain our preference for consumer staples. 

• We maintain our preference in the consumer staples space as we think their earnings are more resilient in view of the uncertain macro-environment. 
• On top of resilient incomes, we also prefer companies that have shown track records or strong potential in improving operational efficiencies over the years. Hence, our Top Picks are an F&B player and grocery retailers – BreadTalk, Dairy Farm and Sheng Siong.

Juliana Cai CFA RHB Invest | http://www.rhbinvest.com.sg/ 2017-01-03

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