Be discerning in 2014
• Advocate selective and bottom-up strategy for 2014
• FY14F overall earnings growth reduced from 14% to 9% on slower private consumption and lower margins
• Possible de-rating risk if earnings continue to underperform, with average valuations at +1SD above historical mean
• Selective stock picks are Osim for growth; Courts and Del Monte for being oversold
Outlook – Sector not cheap, further de-rating risk
• Lowered FY14F growth post 3Q results.
Following disappointing 3Q results, we have reduced revenue and net profit growth assumptions for consumer companies under our coverage. We now expect FY13F/14F revenue growth of 4%/7%, from 6%/8% previously. Coupled with expectations of weaker margins, we project a slower net profit growth of 4%/9% (from 18%/14%), for FY13F/14F.
• Sector at +1SD above mean; further de-rating risk if earnings disappoint further.
Singapore consumer stocks under coverage are not cheap. The sector has re-rated and has been trading above its historical average mean since early 2012, which in our view was supported by robust top line growth and the market’s positive longer term consumption outlook. Following concerns of the Fed’s tapering and disappointing 3Q earnings, average valuations have corrected down to +1SD above mean, from +2SD in early 2013. Given the lowered growth outlook and slower private consumption growth, de-rating could continue for some stocks should they miss earnings expectations in 2014.
• Regional economies to register GDP growth, but private consumption to increase at slower pace.
According to our economists’ projection for the ASEAN region, GDP growth next year is expected to be relatively similar to 2013. For FY14F, growth is projected to be 4% to 6.5%, rather similar to 2013‘s of around 3.2% to 5.7%, led by assumption of growth in exports. Private consumption, on the other hand, is expected to grow at a slower pace compared to 2013, as forecast by our economists. We believe these will translate into muted revenue growth outlook for companies generally exposed to ASEAN. In line with flat domestic demand regionally, we have moderated our revenue growth projections for the consumer sector next year to just 7%, down from 8% previously.
Sector risk – Input costs may bottom out
More downside than upside margin surprise.
We believe the probability of margins surprising on the upside is low as we enter 2014. Commodity prices have generally declined, some by as much as 40%, from 2011 to 2013. In fact, prices for certain commodities have reversed in recent months. As such, we believe there is downside risk in margins, should commodity prices reverse and head higher. Fortunately, most of the companies under our coverage universe hedge their commodity prices for 3-6 months. Although we do not expect a major near-term impact, the eventual rise in overall commodity prices will negate any upside surprises, and could eventually affect margins if the increase is sustained for a longer term.
Valuation & Stock Picks
Advocate selective bottom-up strategy.
We adopt a selective stock picking strategy on the Singapore consumer sector for 2014. Amid expectations of slower private consumption growth in 2014, we look to pick stocks with positive company specific drivers to outperform within the Singapore consumer space. We have selected stocks based on the following: 1) stronger fundamentals and better resilience to softening revenue and margin compression; 2) oversold companies at attractive valuations; and 3) stable earnings and dividend payout.
• OSIM (BUY, Share price: S$2.30, TP: S$2.60).
Osim has shown continued growth on the back of reasonable valuations. We like the stock for its attractive growth profile and its substantial exposure outside of ASEAN.
• Courts Asia (BUY, Share price: S$0.62, TP: S$0.77).
We recommend a buy based on its attractive valuations, even though Courts Asia has disappointed in its recent earnings announcement. At current levels, we believe the stock is oversold. The company’s valuation is now at -1SD of its mean forward earnings based on FY15F earnings.
• Del Monte Pacific (BUY, Share price: S$0.61, TP S$0.82).
We believe the recent >30% share price retreat has more than priced in the uncertainty of its proposed US$1.675bn acquisition of US-based Del Monte Foods’ Consumer Food Business.
Publish date: 03/01/13