KUALA LUMPUR: The loosening of Movement Control Order (MCO) restrictions, gradual rolling out of vaccines and reopening of the economy are expected to result in modest return to normalcy and hence moderate recovery in consumption behaviour.
Hong Leong Investment Bank Bhd (HLIB) has upgraded the consumer sector from Underweight to Neutral, with valuations of retail players currently depressed and poised for better earnings in 2021.
"Going into 2021, we expect retail spending to be positive year-on-year (YoY) due to low base effect in 2020, however, negative factors remain, namely chronically high unemployment levels translating to continued downward pressure on disposable incomes, and sustained sluggish foot traffic in retail areas such as shopping malls from anxiety surrounding Covid-19.
"While we note that recent vaccine news is positive for overall sentiment, HLIB's internal estimates reckon the roll out will take time, with only about 20 per cent of the population expected to be vaccinated by end-2021," the firm said in a report.
The bank-backed research firm noted that along with the recovery in global consumption, many key commodities prices of consumer staples such as sugar, wheat, milk powder, palm oil, coffee and cocoa have begun to recover between 20-35 per cent since mid- financial year (FY) 2020 lows.
Despite strong rebound in many key commodity prices which is expected to remain going into 2021, HLIB reckon the higher raw material costs will be mitigated by stronger ringgit, (HLIB's internal forecast of average RM4.00/USD in 2021) and better revenues from hotels, restaurants, cafes (HORECA) channels that are gradually returning to regular operations.
However, the research firm noted that the tobacco sector will be reliant on government clamp downs.
To recap, the government had announced measures in Budget 2021 on tobacco namely tightening the renewal of cigarette import licenses, limiting transshipments of cigarettes at certain ports, imposition of tax on the importation of cigarettes with drawback facilities, aimed at curbing the rampant illicit tobacco trade that has come to account for the bulk of tobacco volumes.
"Our channel checks estimate that 30-40 per cent of illicit cigarettes are imported via transhipments.
"While effective clamp down on this channel could drive volumes back to the legal market, we understand this process will take time to bear fruit," HLIB noted.
Recent loosening of MCO restrictions with interstate travel no longer being banned and no limit on the number of diners per table, bodes well for retail players going into next year.
"With valuations of retail players currently depressed and poised for better earnings in 2021, our top picks in the consumer sector are retail stalwarts Focus Point Holdings Bhd with a Buy call and a target price of RM1.02 and
Aeon CO (M) Bhd with upgraded to Buy from Hold previously with a target price RM1.25," the research firm said.
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