Consumer sector: Challenging 2014 ahead
We expect the first half of 2014 to be an uneventful one for the consumer sector, and we maintain our UNDERWEIGHT rating. We feel that revenue growth is likely to be challenging given the recent spate of bearish data points both domestically and abroad, which indicate that consumer spending is likely to be subdued in 2014, and that companies will also continue to face margin pressures from rising operating expenses (i.e. higher staff and rental expenses). In addition, ongoing concerns over the overall macro environment and the focus on rising inflation will also keep a lid on consumer spending. Within our sector coverage our top picks are Sheng Siong Group [BUY; FV: S$0.78] as we like its defensive qualities in the face of weaker domestic sales, and Petra Foods [BUY; FV:S$3.95] for its dominant leadership position in chocolate confectionary products.
2013 recap: a see-sawing year
At the start of the year, we had called for allocation into counters with exposure to EM Asia consumer demand. While that call did fairly well for the first half of the year, it faced some challenges subsequently and YTD gains were eroded. At the company level, revenue growth for consumer-related firms was decent although margin pressures from rising costs had an effect on bottom-line figures.
Top-line growth to face headwinds
For 2014, we expect revenue growth to be a tad more challenging. Data points both domestically and aboard have indicated that consumer spending will not be as forthcoming as before. Concerns over the ongoing global recovery process will continue to dominate consumer focus, as will be the impact of rising inflation on purchasing ability. In fact, we could expect to see companies spend a higher amount in order to attract a single dollar of consumer expenditure vis-a-vis previous years.
Margin pressures to remain
On the cost front, we expect consumer-related companies to face the greatest pressures domestically. Regulatory changes have been rather punitive on companies with higher reliance on foreign labour, and have forced companies to look towards more expensive local help. With this issue extending to other countries in the region via an increase in the minimum wage requirements, we can expect to see an overall increase in wage costs for companies in 2014. This increase in operating expenses may potentially outpace top-line growth - due to greater competitive pressures - and lead to an eventual, further compression of margins.
Consumer sector to be less attractive in 2014
As the consumer sector is cyclical in nature, we expect the first half of 2014 to be an uneventful one for the sector. Investor attention is unlikely to be on consumer-related companies (particularly consumer discretionary counters) given the overall macro uncertainty and challenges ahead, and the sector could see itself trading sideways. That said, we maintain our UNDERWEIGHT rating on the sector. Our top picks are Sheng Siong Group [BUY; FV: S$0.78] as we like its defensive qualities in the face of weaker domestic sales, and Petra Foods [BUY; FV:S$3.95] for its dominant leadership position in chocolate confectionary products.
Publish date: 27/11/13