Consumer counters face cost pressures despite 0% GST

By MARK RAO / Graphic By TMR

The zero-rating of the Goods and Services Tax (GST) had a minimal impact on the performance of local consumer stocks as the sector is in a fully- valued position and continues to face cost pressures.

The Kuala Lumpur (KL) Consumer Product Index was down by 2.22 points at 729.40 last Friday.

The index tracks the performance of all consumer-based counters within the top 100 companies trading on the FTSE Bursa Malaysia KLCI (FBM KLCI) and has a market capitalisation of RM159.21 billion, or 15% of the total FBM KLCI.

TA Securities Holdings Bhd equity research analyst Damia Othman said the zero-rating of the GST will contribute to better bottomline growth for consumer-based companies, but he noted that the majority of listed players in the industry are in a fully-valued position.

“In terms of share price, these consumer counters have done well since the beginning of the year, as well as after the conclusion of the 14th General Election,” she told The Malaysian Reserve (TMR).

“The sector is in a fully-valued position and is running ahead of fundamentals, so it is likely we will see some pullbacks this year.”

Year-to-date, the KL Consumer Product Index has a 12.83% return and gained 90.57 points since Jan 2, 2018.

Several blue-chip consumer stocks were down last Friday with Nestlé (M) Bhd, Fraser & Neave Holdings Bhd and Dutch Lady Milk Industries Bhd falling by RM1.10, RM1.22 and 30 sen respectively.

Damia said the outlook for the sector is ‘Neutral’ as it comes off a fully-valued base while coping with cost pressures in the industry.

“We expect to see a weaker ringgit against the US dollar in the second half of the year, which will have impacts on industry players’ cost of sales, raw material expenses and production costs.

“While the zero-rated GST is beneficial for food and beverage (F&B) and retail players, the industry is highly competitive and companies have to implement pricing strategies that are both affordable to consumers and the business.”

On a net-to-net basis, she said consumer players’ margins will continue to be weighed down by these factors, despite the 0% GST providing stable sales over the long term.

Rakuten Trade Sdn Bhd VP for research Vincent Lau said the zero-rated GST is positive for all sectors directly and indirectly, with consumer-related stocks to benefit the most amid the recent weakness in the market.

“The consumer, retail, F&B and automotive sectors are the clear winners as consumers have more money to spend, while bigger ticket items would be cheaper,” he told TMR, adding that this will be the case during the “tax holiday” until the Sales and Services Tax (SST) comes in.

Meanwhile, British American Tobacco (M) Bhd (BAT) came off a record low of RM22.70 on May 11 this year to close at RM32.58 last Friday.

Damia said the outlook for BAT remains unclear as the impact from the SST is contingent on its coverage and implementation.

“So, it is difficult to determine how consumer players are to fare in the industry, especially tobacco companies who are already pressured by preexisting tax structures,” she said.


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