Part two of Maybank IB’s analysis on private consumption in Malaysia
OUR Economics team sees consumer spending growth staying relatively firm in the third quarter of the year (3Q17) but they expect moderation to set in thereafter. On top of the abovementioned factors, the third — and final installment — of this year’s BR1M payments in August as well as the recently announced cash and financial aids for Felda settlers and army veterans will sustain consumer spending momentum in 3Q17.
However, the effect of measures to boost disposable income highlighted earlier is likely to dissipate later in the year. Consequently, the team forecasts real private consumption growth to “normalise” to a 5.9% growth in 2018 compared to this year’s estimate of 6.7% (i.e. around the 6% growth recorded in 2015-2016).
PLCs’ topline largely mirrored macro consumption growth
The question then is, have the revenue trends of the consumer companies in our coverage mirrored the trend in private consumption growth? Our general conclusion is that there has been some correlation, but the performance of individual companies has varied from one company to the next.
On an aggregate basis, the results have not run too far off from the private consumption growth numbers. Excluding the sin stocks, aggregate revenue for our consumer companies expanded 5.9% in 2015 and 7.4% in 2016 versus private consumption growth of 6% respectively.
The faster growth in 2016 was largely driven by faster revenue growth for Padini, whose sales surged 26% year-on-year (y-o-y) in 2016 due to value-for-money offerings and ongoing outlet expansion.
In the first half of the year (1H17), aggregate revenue growth for our companies (ex-sin stocks) was 6.5% y-o-y, which fairly closely approximated real consumption growth of 6.9%. Revenue growth for most of the companies tracked below consumption growth and ranged from 3-5%.
Only four companies saw much faster growth, with three of these companies recording strong double-digit growth in revenue and they are Bison (24.4% y-o-y), Padini (20.7% y-o-y) and QL Resources (10.6% y-o-y). Berjaya Food meanwhile saw revenue growth of 9.1% y-o-y in 1H17.
Bison’s topline has continued to benefit from new store openings for which it targets about 70 new stores per annum, while Padini has continued to see strong consumer demand for its bundled products, and higher sales from new outlet openings.
QL Resources saw revenue growth pick up from 5.9% in 2016 to 10.6% in 1H17 on higher contribution from both its palm oil (due to higher crude palm oil average selling price) and integrated livestock divisions (higher sales contribution from feed raw material trade).
Having expanded at a double-digit pace over the past few years, Berjaya Food’s revenue growth moderated to 9.2% in 1H17 from 19.1% in 2016 largely on slower same-store-sales growth (SSSG) (Stabucks Malaysia’s SSSG for FY4/16: 5%, FY4/17: flat).
For the sin sector, CAB Cakaran Corporation Bhd’s (CAB) 1H17 revenue expanded 4% y-o-y but in contrast, Heineken Malaysia’s (HEIM) revenue dropped 12% y-o-y, probably due to an earlier Chinese New Year sell in and possibly weaker gains in market share. British American Tobacco’s (BAT) 1H17 revenue fell 22% y-o-y on weaker domestic volumes and also in line with the cessation of contract manufacturing for the export markets in 2Q17.
A mixed bag on bottomline and margins
While revenue growth has generally been stable across most companies, the bottomline results have been mixed. With reference to these companies’ core net profit (since 2015) in general, some have seen flattish or weaker numbers largely on (i) weaker pricing power on weaker consumer sentiment and stiffer competition, (ii) higher operating expense (eg. higher staff costs) and (iii) a normalisation of raw material prices which had previously been depressed.
Some have seen a downtrend in margins
Retailers such as 7-Eleven Malaysia and Aeon have been seeing a downtrend in rolling 12-month earnings before interest and tax (EBIT) margin since late 2014 on higher operating expense and weaker topline growth.
Positively, both 7-Eleven Malaysia and Aeon (retail division) have in 2Q17 seen EBIT margin improved by 50 and 40 basis points quarter-on-quarter, respectively, on better cost management.
7-Eleven Malaysia has also seen a 2.4% SSSG in 2Q17 after eight consecutive quarters of flat/negative SSSG. Meanwhile, Nestle Malaysia’s rolling 12-months EBIT margin has been trending down since 2Q16, partly due to normalization of raw material prices. Nestle Malaysia has since July 1, selectively adjusted upwards product prices by up to 4%.
Margins have however improved for others
On the other hand, while sales growth was moderate, multi-national corporations such as BAT, CAB and HEIM have delivered expansion in margins (rolling 12-month EBIT margin) as they fine- tuned on cost efficiencies (eg. lower fixed overheads, product processes efficiencies).
For Old Town Bhd, its growing fast-moving consumer goods exports with generally higher margin (vs food and beverage) have resulted in better margins overall.
As for Padini, FY16-17 margins were largely stable due to its all year round promotion and discounting efforts which have resulted in a strong sales volume growth, offsetting the weaker gross profit margins. This, in turn, has resulted in bottomline growth.
Liew Wei Han and Kevin Wong are Maybank IB analysts.