• Strong CY14 growth expected for sector
• Pay attention to potential headwinds in jittery market
• Prefer stocks resilient to identified headwinds

Jittery price actions in sector despite inline CY13 earnings

FTSE Consumer Services (FSTCS) Index lagged the FSSTI in the beginning of CY14. Global macro factors such as weak Chinese manufacturing data sent regional equity markets down which saw FSTCS Index slumping by as much as 7.0% in early Feb-14. Fundamentals held up well as FSTCS Index’s weighted EPS in CY13 came in at 40.0, which was largely in line with street’s estimate (+1.8%).

Covered counters’ prices and earnings display resilience YTD

Consumer counters under our coverage (BreadTalk Group, Petra Foods and Sheng Siong Group) were relatively less affected by the macro events with a maximum decline of only 4% between Jan and Feb. We see three trends in their 4QCY13 and CY13 earnings: 1) strong revenue growth, 2) stable margins, and 3) USD-denominated results being hurt by weaker regional currencies.

Headwinds ahead; maintain UNDERWEIGHT

We identify three headwinds ahead that could derail growth: 1) possible credit crunch in China, 2) significantly higher labour costs, and 3) political unrest. First, there are growing concerns about a shadow-banking credit crunch in China. Given the tight trade links, a credit crunch will cause financing issues and unemployment beyond China. Second, Asian economies are raising minimum wages to help the lower income, with some raises at above 10%. Third, political unrest in Thailand might escalate again or we might see further alignment of other countries to the two factions in Russia’s annexation of Crimea. We maintain UNDERWEIGHT on the sector. We think the trading premium of 1 s.d. above its 2-year historical average could be eroded readily with downturn in market sentiments as seen in Feb-14.

Prefer resilience to headwinds in jittery market

The street expects FSTCS Index’s EPS to increase by 10.6% to 44.3 in CY14. Other than strong expected corporate earnings, we are looking for resilience to headwinds in this jittery market. We prefer: 1) lesser exposure to higher risk areas, 2) established market leadership, and 3) sustainable growth strategy. First, we think of higher risk areas in terms of susceptibility to the identified headwinds. Second, we believe current market leaders with strong brand recognition will have shorter gestation period for new products or stores, which is important in Asia where consumption pattern are rapidly changing. Third, we look out for sustainable growth strategy that takes into consideration the risks and costs of expansion, particularly so in a rising interest rate environment and a looming credit crunch threat. Based on the above, we continue to like Sheng Siong Group [BUY; S$0.68] and Petra Foods [BUY; S$4.08] but not BreadTalk Group [SELL; S$0.85].

Source: OCBC Research - 21 Mar 2014