Consumer products sector continues to face inflationary pressures

KUALA LUMPUR: The coming quarters could continue to be challenging for the consumer products sector following a second quarter of 2023 that was impacted by rising operating costs and softer consumer spending.

According to RHB Research, 3Q23 could see the continuation of the trend experienced in the second quarter, where earnings normalised from a strong base in the year before and margins slipped on the back of rising operating costs.

“Considering the lack of festivities, we expect 3Q23 to see q-o-q weakness and similar y-o-y trends as 2Q23.

“In view of the subdued consumer sentiment on the back of elevated inflationary pressures, we

foresee more promotional activities and marketing engagements to be initiated in order to spur consumer spending,” said the research firm.

Hoewver, there could be positives ahead as input cost pressure may recede given the more stable trend of commodity prices and forex, on top of the fall in freight rates.

RHB said gross profit margins could be improving going forward into 2H23, especially for food manufacturers.

“Overall, we believe consumer spending will remain resilient, notwithstanding the aforementioned challenges – supported by healthy economic growth and stable employment market,” it added.

During the second quarter, RHB said seven of the 13 companies under its sector coverage reported earnings that were in-line with expectations, while six disappointed and one surprised to the upside.

It said the weakness was generally seen in consumer discretionary base given the high 2Q22 base bossted by the broad economic reopening and special EPF withdrawal.

Sales growth for consumer staple companies, however, remained firm despite the inflationary pressures and cautious consumer sentiment.

RHB’s top sector picks include MR DIY given its visible growth trajectory driven by cost tailwinds and sticky demand, and DXN for its attractive valuation and solid growth prospects underpinned by new market expansion and insulation from the rising costs.

Heineken is the research firm’s preferred brewery pick considering the relatively cheaper valuation and market leadership in Malaysia.

It also highlighted Guan Chong as it believes its forward-selling mechanism, coupled with strong sales channel and multi-national corporation clientele should continue to support its solid earnings base.

RHB maintained its “neutral” call on the sector pending the tabling of Budget 2024 on Oct 13, 2023, for moer clarity on potential regulatory changes.