We downgrade the consumer sector to UNDERWEIGHT in light of the weaker SG retail sales figures for Apr and the potential threats to regional consumer spending (i.e macro-overhang, government policy changes and greater foreign competition). With sales figures likely to showcase unimpressive results for May, 2QCY13 could well shape out to be a muted quarter in terms of top-line growth for consumer companies. Furthermore, operating cost pressures resulting from higher wage costs and advertising and promotional spending still remain so operating margins are likely to stay depressed. Within the sector, we favour counters with defensive qualities such as Sheng Siong [BUY; FV: S$0.82] or counters with potential M&A activity Viz Branz [BUY; FV: S$0.74]. (Lim Siyi)
SG Apr sales remain weak
Singapore retail sales (excluding the heavily weighted motor vehicles component) fell 0.9% MoM (value) and 0.2% MoM (volume) for Apr as spending eased in categories such as petrol, department stores, clothing apparel and food and beverage. While part of the decline was due to lower fuel prices, Apr's figure was the fourth decline in five months. With May's figures likely to register another MoM slide (as with the past two years), the overall trend does not bode well for the consumer sector for 2QCY13. Even on a YoY basis, retail sales have reverted to a downward trend since the seasonal peak in Feb.
Overseas contributions face challenges
For the majority of the SG consumer companies, reliance on overseas contributions (i.e. South-East Asia (SEA), China) is more significant vis-à-vis domestic sales, with the former being pretty resilient in the past quarters. However, potential events (e.g. removal of fuel subsidies in Indonesia, withdrawal of foreign direct investment from emerging Asia as a result of global equity losses) could have a detrimental impact on consumer spending. On the supply side, the influx of foreign competitors will also lead to margin reduction and higher advertising costs.
A muted 2QCY13?
As a recap, for the 1QCY13 corporate earnings season, consumer-related companies under the FTSE Straits Times Consumer Services Index (FSTCS Index) reported lower earnings per share figures in Singapore dollar terms than the street had anticipated (missed consensus projections by 25.4%) as higher operating expenses hurt margins. In our view, the 2QCY13 could exhibit the same trends as well, which would dampen enthusiasm for the sector.
Downgrade to UNDERWEIGHT; favour defensives
The broad equity market correction has erased most of the YTD gains for the sector but we do not feel that an inflection point has been established yet. We downgrade the consumer sector to UNDERWEIGHT as the overhang of macro-uncertainty could see consumer spending fall more than expected. We favour counters with defensive qualities such as Sheng Siong [BUY; FV: S$0.82] or counters with potential M&A activity Viz Branz [BUY; FV: S$0.74].
Singapore retail sales (excluding the heavily weighted motor vehicles component) fell 0.9% MoM (value) and 0.2% MoM (volume) for Apr as spending eased in categories such as petrol, department stores, clothing apparel and food and beverage. While part of the decline was due to lower fuel prices, Apr's figure was the fourth decline in five months. With May's figures likely to register another MoM slide (as with the past two years), the overall trend does not bode well for the consumer sector for 2QCY13. Even on a YoY basis, retail sales have reverted to a downward trend since the seasonal peak in Feb.
Overseas contributions face challenges
For the majority of the SG consumer companies, reliance on overseas contributions (i.e. South-East Asia (SEA), China) is more significant vis-à-vis domestic sales, with the former being pretty resilient in the past quarters. However, potential events (e.g. removal of fuel subsidies in Indonesia, withdrawal of foreign direct investment from emerging Asia as a result of global equity losses) could have a detrimental impact on consumer spending. On the supply side, the influx of foreign competitors will also lead to margin reduction and higher advertising costs.
A muted 2QCY13?
As a recap, for the 1QCY13 corporate earnings season, consumer-related companies under the FTSE Straits Times Consumer Services Index (FSTCS Index) reported lower earnings per share figures in Singapore dollar terms than the street had anticipated (missed consensus projections by 25.4%) as higher operating expenses hurt margins. In our view, the 2QCY13 could exhibit the same trends as well, which would dampen enthusiasm for the sector.
Downgrade to UNDERWEIGHT; favour defensives
The broad equity market correction has erased most of the YTD gains for the sector but we do not feel that an inflection point has been established yet. We downgrade the consumer sector to UNDERWEIGHT as the overhang of macro-uncertainty could see consumer spending fall more than expected. We favour counters with defensive qualities such as Sheng Siong [BUY; FV: S$0.82] or counters with potential M&A activity Viz Branz [BUY; FV: S$0.74].
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