THAI BEVERAGE PUBLIC CO LTD (SGX:Y92)
SHENG SIONG GROUP LTD (SGX:OV8)
KOUFU GROUP LIMITED (SGX:VL6)
JUMBO GROUP LIMITED (SGX:42R)
2019 Outlook & Strategy ~ Consumer Goods - Defensive Attributes Preferred
- Despite dark uncertainties over trade war, Singapore 2019F GDP is expected to grow at 3% driven by services sector.
- Amid uncertainties, consumer sector likely to outperform due to it defensive traits vis-à-vis other cyclical industries.
- Favour consumer stocks with and defensive profile and/or attractive valuations.
- Stock picks: Thai Beverage, Sheng Siong Group, KouFu Group .
Outlook
2019 GDP benefitting from 2018 spillover.
- Our Singapore economist raised Singapore’s 2018F GDP forecast to 3.4% (from 3% previously) and 2019F’s GDP to 3% (from 2.7%) in October, following a sequential uptick in Singapore’s 3Q18 GDP. While the looming trade war could point to dark clouds ahead, our economist notes that Singapore’s economy has remained sanguine.
Singapore F&B and Retail Services stand out amid uncertainties.
- Singapore retail sales over the past few months have seen a shift in retail spending from consumer staples into more discretionary categories. Food & Beverage Services have been doing relatively better in recent months, particularly restaurants and fast food outlets.
- A notable trend is that discretionary items such as Apparel & Footwear, Medical Goods & Toiletries, Furniture and Household Equipment, Recreational Goods, and even Watches & Jewellery have seen a y-o-y pick-up in terms of retail sales. This coincides with a recent survey by Singstats on the services business expectations, indicating that these categories (F&B, Retail Services) are expecting better prospects in the next six months (from Oct 2018) to Mar 2019.
Slower growth in some ASEAN countries, but not a slowdown.
- Our economics team currently projects ASEAN-6 ex-Singapore’s GDP to grow by 4.2-6.6% in 2019. In particular, key emerging markets such as Vietnam, Philippines and Indonesia are expected to see an uptick in GDP growth from 2018’s rate. We note that Thailand and Indonesia are expected to hold their general elections in 2019, which could see their economies benefitting from domestic consumption ahead of the polls.
- Over the longer term, our economist postulates that the ASEAN region could benefit from trade diversion arising from the current US-China tension.
FY19F earnings growth uptick from recovery in weak demand, costs.
- Based on our coverage of the Singapore downstream consumer sector, we are projecting that earnings will decline by c.4% in FY18F, largely on the back of weaker earnings from ThaiBev. In addition, several companies under our coverage have reported higher operating costs, largely related to expansion initiatives into the UK, China, Hong Kong, Macau, Taiwan, and ASEAN in 2018. While revenue is largely satisfactory, earnings have been dampened by initial start-up losses.
- Barring a significant weakening in consumer sentiment, we believe operating margins could rise as start-up costs contract. We are currently projecting earnings growth for our downstream consumer coverage to be c.14% in FY19F, driven mainly by a rebound from THAI BEVERAGE PUBLIC CO LTD (SGX:Y92)’s soft FY18 earnings in the lead up to the Thai elections, and ramp up from new outlets opened in the past year (SHENG SIONG GROUP LTD (SGX:OV8), JUMBO GROUP LIMITED (SGX:42R)).
Risks
Spillover effects of trade war uncertainty affecting consumer sentiment.
- While ASEAN countries may benefit from trade diversion over the medium term, a global slowdown could impact consumer sentiment. Singapore’s YTD 2018 gross margins have improved over last year, benefitting from more favourable raw material prices compared to last year.
- We expect margins to remain healthy but should regional currencies continue to weaken vs US dollar, this could have an impact on costs, particularly imported raw materials. Lastly, a longer-than-expected breakeven of start-ups among those companies expanding overseas may also dampen earnings in 2019F.
Valuation and Stock Picks
Valuation attractive, currently below 5-year historical average.
- The sector valuation (based on stocks under our coverage) is currently at 21.7x PE, which is about -0.7x below its 5-year historical average. We believe with the headwinds faced by more cyclical sectors, the consumer sector’s defensive traits are sought after.
- To ride out the uncertainties in the immediate term, we favour stocks with more resilient earnings, strong cashflows/balance sheets and/or attractive valuations.
SHENG SIONG GROUP LTD (SGX:OV8): Rating: BUY, Target Price: S$1.24.
- We maintain our BUY recommendation for Sheng Siong Group with Target Price of S$1.24 as we continue to see growth driven by more new stores after already opening eight new stores since 4Q17, improving efficiencies and margins from better sales mix, and warehouse expansion that will kick in from FY19F.
- The near-term outlook for new HDB supermarkets remains robust with five outlets up for tender in the next six months. Dividend yield is decent at 3-3.5% with potential for a higher payout.
THAI BEVERAGE PUBLIC CO LTD (SGX:Y92): Rating: BUY, Target Price: S$0.87.
- We maintain our view that we are near or at the bottom of its operational performance, which should pick up in FY19. This is on the back of the expected Thailand elections and King’s coronation. Thai Beverage recently issued Bt77bn of debentures to refinance existing bank loans, and the fixing of coupon rates should allay investors' concerns on the group’s exposure in light of the rising interest rate environment.
- Extraction of synergies from its Sabeco acquisition are medium-term growth drivers.
KOUFU GROUP LIMITED (SGX:VL6): Rating: BUY, Target Price: S$0.80.
- We maintain our BUY rating for KouFu with a Target Price of S$0.80. We expect FY19F earnings to recover after declining slightly in FY18, and expect FY20-21F earnings to hold steady as revenue growth is offset by higher costs. Revenue growth is expected to be led by new food courts in Singapore and Macau, but higher operating costs and depreciation would partially offset the increase in revenue.
- Longer-term drivers include the setting up of an integrated facility aimed at delivering economies of scale, and overseas growth from Macau.
Andy SIM CFA
DBS Group Research
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Alfie YEO
DBS Research
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https://www.dbsvickers.com/
2018-11-26
SGX Stock
Analyst Report
0.870
SAME
0.870
1.240
SAME
1.240
0.800
SAME
0.800
0.440
SAME
0.440
DBS Group Research | 2019 Outlook & Strategy
2019 Outlook & Strategy: Pitch On Value
2019 Outlook & Strategy: Growth & Valuations
2019 Outlook & Strategy: Top Stock Picks
DBS Group Research | 2019 Sector Outlook
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