Still under pressure
For 2HCY13, we expect consumer-related companies under the FTSE Straits Times Consumer Services Index (FSTCS Index) to experience lower-than-expected revenue growth as sentiment turns bearish both domestically and abroad. With weaker economic data points (e.g. Indonesia’s GDP and China’s slowdown) re-affirming lingering economic uncertainty, consumer companies are likely to face challenges as consumers shift away from discretionary spending. As we expect sell-offs of the sector to continue in light of these headwinds, we maintain our UNDERWEIGHT rating on the sector. Within the sector, we favour counters with defensive qualities such as Sheng Siong [BUY; FV: S$0.82] over counters with high exposure to emerging Asia consumer demand like Petra Foods [HOLD; FV: S$3.95] and counters with wafer-thin operating margins like BreadTalk [SELL; FV: S$0.77].
2Q earnings: revenue below expectations
According to Bloomberg, consumer-related companies under the FTSE Straits Times Consumer Services Index (FSTCS Index) reported lower-than-expected top-line figures for 2QCY13 (below estimates by 6.6%). Fortunately, a favourable cost environment during the quarter helped to improve earnings per share (EPS), which fared better at +11.5% over forecasts.
What does this mean? A weaker 2HCY13
Despite the decent bottom-line performance, we are likely to see a continuation of lower-than-expected revenue growth in 2HCY13 as consumer demand face headwinds in the respective domestic and overseas markets. The favourable cost environment is also likely to reverse in light of rising fuel costs and inflation concerns, which pose potential challenges to operating margins and hinder the ability of companies to pass on price increases to consumers.
Muted domestic outlook
Domestically, SG retail sales are still remain tepid and uninspiring, in our view. Inflation and economic uncertainty remains the top two concerns for consumers, who have indicated in a series of surveys conducted that they intend to cut back on discretionary spending. Given this sentiment, we expect domestic spending to taper off in most categories except supermarkets, where we anticipate a continued shift in spending patterns towards dining-in. On a positive note, tourist spending could help to cushion the drop-off, especially with the upcoming F1 event in Sep.
EM Asia data points turning bearish
Looking abroad, the recent economic data points such as the reduction of Indonesia’s GDP forecast, falling consumer confidence, possible slowdown in China etc have suggested that the regional retail outlook is also turning a tad bearish. Coupled with the weakening regional currencies against the US and Singapore dollar, consumer companies with regional exposure could face greater headwinds in the coming months.
Maintain UNDERWEIGHT; favour defensives
We maintain our UNDERWEIGHT on the sector in light of the overhang of macro-uncertainty, and the sector to continue de-rating with investors locking-in profits from before. Within the sector, we favour counters with defensive qualities such as Sheng Siong [BUY; FV: S$0.80] over counters with high exposure to emerging Asia consumer demand like Petra Foods [HOLD; FV: S$3.95] and with thin margins like BreadTalk [SELL; FV: S$0.77].