KUALA LUMPUR: RHB research believes that investor sentiment on the consumer products sector should remain muted until there is more clarity on the impact of the subsidy rationalisation.
Nevertheless, the investment bank said consumer spending, although unexciting, will be supported by the stable employment market and continued government assistance given to the lower-income groups.
"Current valuations may have largely priced in the downside risks and our base case does not assume that the subsidy rationalisation will significantly dampen consumer spending," it said in a note.
As such, RHB Research has maintained a "Neutral" rating on the consumer products sector, with its top picks being Mr DIY Group (M) Bhd, DXN Holdings Bhd, Heineken Malaysia Bhd and Guan Chong Bhd.
The firm explained that it continues to like Mr DIY for its value-for-money product offerings and sticky demand, which should underpin its robust earnings growth above the sector average as well as its continuous network expansion.
"We also like DXN Holdings for its attractive valuation and exciting growth prospects, with its imminent entry into the Brazil and Argentina markets. "Guan Chong may see a strong turnaround in the financial year 2024 (FY24) forecast on a potential normalisation of cocoa bean prices. "We also like both the breweries for their undemanding valuations and approximately six per cent dividend yields, backed by relatively inelastic demand for their products," it noted.
On 2024 outlook for the sector, RHB research believes investors' key concerns will continue to revolve around the inflationary risks arising from reform measures including the subsidy rationalisation and consumption taxes.
It added that this is after an underwhelming 2023 when sentiment on the sector was dented by an unfavourable base effect and erosion in consumer spending power.
"As a result, our economists are projecting a modest 2024 private consumption growth of 3.3 per cent year-on-year (YoY) and a pick-up in inflation to 3.3 per cent.
"With that, consumer sentiment should remain subdued – translating to lacklustre sales volume growth for most of the consumer companies we cover. "This environment would also cap any average selling price (ASP) growth, so we believe there will be limited headroom for global price management system (GPMs) to expand," it said.
Additionally, RHB research also said the targeted approach on subsidy rationalisation that is likely to be adopted may end up having the effect of a cash transfer from the latter to the former, which has a higher marginal propensity to consume.
It said this should benefit players like Nestle Malaysia Bhd, Mr DIY, Farm Fresh Bhd and Padini Holdings Bhd.
Furthermore, the bank added that a stronger fiscal position from the reform initiatives could give the government better leeway in reviewing the salary scheme for civil servants, which is ongoing.
It noted that a positive outcome could serve as a major catalyst to boost consumer spending.
Moving forward, RHB Research said downside risks to its sector weighting includes more severe-than-expected reform measures and a sharp rise in operating costs.