PETALING JAYA: The consumer sector is seen as a defensive play, given the resilient demand for staple-related products, solid domestic consumption backed by stable labour market, robust retail trade and increased tourism activities, says MIDF Research.
The research firm, which is positive on the sector's outlook, said food and beverage (F&B) producers are in for better profit margins, driven by declining global commodities prices and previous price hikes, offsetting other cost pressures.
Additionally, the normalising soybean meal and corn futures prices suggest lower raw material costs for poultry players, further supporting their profit margins, it said in its latest sector report.
Hence, MIDF Research's top picks continue to be consumer staple-related companies that exhibit resilient demand such as QL Resources Bhd, with a target price (TP) of RM6.75 a share, and Fraser & Neave Holdings Bhd or F&N (TP: RM33.50).
"We favour QL Resources, which is supported by consistent demand for marine and livestocks products.
"We also like F&N because the company is likely to benefit from the rising demand for ready-to-drink beverages, which is being fuelled by an increase in tourist traffic," it added.
Currently, QL Resources and F&N have attractive valuations.
MIDF Research said QL Resources has a price-to-earnings ratio (PER) of 28.3 times for 2024 while F&N's PER is 16.7 times for the same year.
"These stocks might be undervalued, making them compelling investments in the consumer staple sector, considering their strong fundamentals," it said.
Looking ahead, the research firm said: "Our economists anticipate a stronger ringgit, with an average exchange rate of US$1:RM4.43 for 2023, projected to reach US$1:RM4.24 by the end of the year."
Consequently, a stronger ringgit is expected to benefit consumer staple companies, including both F&B and poultry players, as it has the potential to lower their raw material costs.
MIDF Research, however, said export-oriented companies such as Asia File Corp Bhd and Rhong Khen International Bhd may experience lower sales due to the stronger ringgit against the US dollar, as a significant portion of their revenue is received in greenback.
Meanwhile, the expectations of lower animal feed costs, along with government subsidies, are expected to support profit margins against the ongoing price ceilings for chicken and eggs.
"As such, this will benefit poultry companies like QL Resources (TP: RM6.75) and Leong Hup International Bhd (TP: 50 sen).
"Furthermore, given the expectation of falling animal feed costs, this could encourage poultry players to increase the supply of Grade A eggs and, hence, lower the average price for Grade A eggs in the near term," said MIDF Research.
The research firm expected continued growth in the retail sector throughout this year.
"This is expected to encompass non-specialised stores, as well as the F&B and tobacco segments in specialised stores, underpinned by sustained demand for essential items, the resurgence of out-of-home consumption following the economy reopening and an uptick in tourist arrivals," it added.
As such, MIDF Research anticipated non-specialised retailers such as Aeon Co (M) Bhd (TP: RM1.40) and Family Mart within QL Resources, will reap the benefits of this uptrend.
Additionally, considering its competitively priced products, Padini Holdings Bhd (TP: RM4.60) is well-positioned to capitalise on the favourable retail trade environment, it noted.
Looking ahead, MIDF Research foresees decreasing raw material costs for food manufacturers due to the lowering of futures prices for key commodities such as wheat and crude palm oil.
In August 2023, despite fluctuations in the average three-month future prices of global commodities, the commodities futures remained significantly below their two-year peak levels.
"This suggests the potential for lower raw material costs in the near term, aligning with the ongoing global trend of declining commodity prices," it noted.
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