DBS: ASEAN Consumer Stocks to Look at after 2Q16 (Part 2)

In part 1 of the series, we have covered the consumer market outlook of Singapore and the Philippines. In part 2 of the series, we will highlight two other ASEAN countries that DBS highlighted in view of the favourable consumption demand in ASEAN: Malaysia and Thailand.

Malaysia

Recovery in Consumption

After about 1.5 years since the implementation of goods and services tax (GST) in Malyasia, the impact of GST is subsiding as consumer spending and visits to shopping malls gradually recover. Since hitting a record low of 64 points in December 2015, the Consumer Sentiment Index (CSI) has gradually recovered and reached 79 points as of June 2016. The recovery in CSI was attributed to waning concern of job prospects, stability of foreign exchange, and stability in current household income.

Budget to Support Consumption

From a macro perspective, the Malaysian government is targeting to table Budget 2017 on 21^st October. There are speculations that the authorities are studying the possibility of granting tax relief to the middle 40 percent income bracket (M40) under Budget 2017 to help them cope with rising costs of living. Potential fiscal stimulus to be announced in the upcoming budget, coupled with additional rate cut by the Bank Negara Malaysia (BNM), could help to support consumer spending.

Investor Takeaway: Malaysia Strategy

DBS favours Malaysian consumer stocks with resilient business models, attractive value propositions and established brand names to withstand the continued challenging operating environment. On top of that, companies should have strong balance sheets to undertake earnings-accretive merger and acquisitions (M&A) activities to drive growth and/or engage in capital management exercises to reward shareholders. Companies with regional exposure could help to mitigate any potential domestic earnings risks.

OldTown White Coffee: Growth in FMCG Segment Undervalued

OldTown reported 1Q17 net profit of RM 14 million (+48 percent yoy) mainly boosted by high revenue contribution from its FMCG operations.

Expect More Growth from FMCG Segment

OldTown’s revenue from its fast-moving consumer goods (FMCG) segment increased by 21 percent year-on-year to RM 57 million due to stronger export sales as its China sales grew by a staggering 240 percent. Sales to China makes up only less than six percent of FMCG sales in FY16, and there is plenty of room for the group to boost export sales, especially with the completion of the restructuring of its China distributorship in late 2015.

Hiccup In April

DBS believes that OldTown’s FMCG segment could have been stronger in 1Q17 had the FMCG manufacturing plant not broken down in the third week of April this year. The breakdown resulted in production hiccups and the group was only able to meet 85 percent of the domestic demand in 1Q17. According to DBS, this led to an approximate 20 percent drop in its domestic sales.

Potential Special Dividend

DBS is also upbeat that there is a higher chance of a special dividend of 3sen/share in view of OldTown’s increasing cash pile (35sen net cash/share), lack of M&A target, and management guidance that they intend to continue rewarding shareholders. A potential special dividend of 3sen per share could raise its dividend yield to about 4.5 percent.

BUY, TP RM 2.15

Thailand

Thailand’s economy has been picking up slowly with GDP growth. Thailand’s 1H16 GDP grew at 3.4 percent, mainly boosted by continued growth in public investment and consumption. Private consumption also showed improvement on the back of the increase in expenditure on durable goods driven by improved farm income and the government’s stimulus.

Growing Confidence among Thai Consumers

Following political stability, government spending, easing concerns over drought, and voters’ approval of the draft charter, Thai consumer confidence index rose for three consecutive months in September. Retail sales have also returned to positive growth after negative readings in the past two years.

Tourism Still the Bright Spot for Thai Economy

Tourism will continue to boost the Thai economy. International tourist arrivals grew by 9.1 percent to 19.5 million in 7M16, which is on track to reach the government’s full-year growth forecast of at least 10 percent to 33 million in 2016.

Investor Takeaway: Thailand Strategy

DBS prefers domestic plays over export plays, given the continued recovery in domestic consumption amid rising external uncertainties.

CP ALL: Buoyed By Synergistic Expansion

CPALL, which operates convenience store businesses in Thailand under the 7-Eleven trademark, continues to aggressively expand its outlets in Thailand. CPALL has set its sight on running 12,000 stores in the next three years as the management believes that opportunities are still aplenty in Bangkok, especially with the upcoming mass transit lines.

Economies of Scale from Expansion

CPALL has been delivering positive same-store-sales-growth (SSSG), outperforming other retailers. DBS expects CPALL’s SSSG to be resilient moving forward. Apart from increasing sales, CPALL’s expansion will bring about economies of scale to improve its margins. On top of that, with a larger network of stores, CPALL will have a stronger bargaining power on supply contracts.

BUY, TP THB 75