Consumer & Gaming Sector Outlook - Maybank Kim Eng 2019-04-17: Pinched Purse Strings, ASF And Levies

Consumer Sector Outlook - Maybank Kim Eng Research | SGinvestors.io GENTING SINGAPORE LIMITED (SGX:G13) JAPFA LTD. (SGX:UD2) SHENG SIONG GROUP LTD (SGX:OV8)

Consumer & Gaming Sector Outlook - Pinched Purse Strings, ASF And Levies

  • Analyst(s) sector view: NEUTRAL

F&B and retail in need of some therapy

  • We see the near-term outlook for the sector remaining muted largely because the Singapore consumer will further tighten their purses amid slower GDP and slow-to-stagnant wage growth. We see the consumer sector facing the double whammy of both labour cost pressures (expected to worsen in 2020 when the Dependency Ceiling Ratio revision kicks in) and a weaker propensity to spend.
  • The key upside risks to our estimates and SELL rating on SHENG SIONG GROUP LTD (SGX:OV8) are easing competition, improving consumer sentiment and better-than-expected cost control. We believe the current P/E valuation of 21.4x 2019F does not take into account that Sheng Siong Group is not immune to a slowdown in consumer spending and the resultant shrinking basket sizes. See report: Sheng Siong Group - No Mood To Shop.

Protein consumption outlook positive but has near-term risks

  • In the upstream F&B space, JAPFA LTD. (SGX:UD2), one of the largest industrialised farming companies in ASEAN, will continue to benefit from long-term secular consumption growth trends with operations in populous, high-growth emerging economies of Indonesia, Vietnam, Myanmar, India, and China. In those countries, per capita protein consumption is still low as is penetration levels of industrialised farming.
  • But in the near term, it faces the challenges of an exceptionally high base due to the good FY18 across all key business segments of poultry, swine and dairy; hence, profit growth for FY19 is expected to be negative. Additionally the spread of African Swine Flu (ASF) into Vietnam in 1Q19 poses a wild card disruption threat to its swine farming operations in the country.
  • Despite the near term risks, we have a BUY rating on Japfa. See report: Japfa Ltd - Chicken Run.
  • We believe the stock is undervalued at a core FY19E P/E of just 8.6x, a material discount to the 20x+ witnessed for peer baskets of upstream APAC feed and protein producers and China dairy firms. Also, excluding its stake in listed subsidiary PT Japfa Tbk (JPFA IN), its stub FY19E P/E is sub-4x for the other businesses that should generate cUSD40-50m in profit this year.

Gaming: Drag of levies and taxes offset possible VIP lift

  • We are more positive on Singapore’s VIP market outlook relative to Macau. Marina Bay Sands (MBS) and Resorts World Sentosa (RWS) can ease their hitherto tight credit policies to VIPs. Both may also benefit from more ASEAN VIPs, as Resorts World Genting (RWG) cut its junket commission/direct VIP rebate rates because its casino tax rates were hiked 10ppts on 1 Jan 2019, this development would make MBS and RWS’ direct VIP rebate rates relatively more attractive to ASEAN VIPs. VIP volumes may also receive another boost should more international market agents be approved.
  • That said, casino entry levies for Singaporeans and PRs (SCPRs) were raised 50% to SGD150 for the daily levy and to SGD3,000 for the annual levy on 4 Apr 2019. This is negative to mass market GGR, as we understand SCPRs account for ~1/3 of visitor arrivals but ~2/3 of mass market GGR. Based on this, in 4 Apr 2019 report: Genting Singapore - Visionary RWS 2.0 But Expect Short Term Pain Before Long Term Gain, we cut FY19/FY20/FY21 EPS by -6%/-16%/-16% and downgraded our rating to HOLD on cuts to our FY19/FY20 mass market GGR forecast from +5%/+5% to +0%/-5%.
  • Furthermore, RWS will be subject to higher casino tax rates come Mar 2022. This will also be exacerbated by the 2ppt GST hike to 9% expected to take effect between 2021 and 2025. On balance, we expect the effective casino tax rate will be hiked by 5ppts. Thus, we fear that GENTING SINGAPORE LIMITED (SGX:G13) earnings will structurally contract again come Mar 2022 before growing as the new RWS2.0 development and enhancements come on-stream by 2024-2025.
  • Key lookout for Genting Singapore this year is a potential expansion into Japan, which could come as soon as 4Q19.

Singapore Research Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-04-17
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.120 SAME 1.120