• Cautious in the near-term
• Broadly supportive regional outlook in the long term
• Upgrade to Neutral

Corrections likely ahead

The sector did better than FSSTI in 1H14 when the market had a recovery, but this eventually did not sustain for FTSE Consumer Services (FSTCS) Index since Aug-14 and for FTSE Consumer Goods (FSTCG) Index in the past month. Both indices have also returned to their initial levels seen at the start of the year. We note that FSTCS and FSTCG indices' forward PER levels had a sustained uptrend since Mar-14. In particular, their forward PER levels have been trading at premiums of more than 1 s.d. above their 2-year historical averages since Aug-14 and hitting a new high. In consideration of past trends as well as the sector’s cyclical nature, we reiterate that investors should be cautious as corrections in the forward PER levels are likely in the near term while ultimately the broadly supportive regional outlook will provide upside.

Reforms to drive regional consumption growth

Looking ahead, we expect to see supportive country-specific reforms such as postelection stimulus measures for Indonesia and Thailand as well as accelerated reconstruction spending in Philippines. This is also backed by the rising optimism seen from consumer confidence indices of our selected ASEAN countries. IMF forecasts for these countries’ GDP growth are fairly stable, while Thailand is set to see a jump from 1.0% to 4.6% in 2015. Despite the time lags in implementations, the positive effects on the economies should spell better times ahead for regional consumption growth.

Upgrade to NEUTRAL

We upgrade our call to NEUTRAL for the sector, as we have seen a steady performance within our counters over the year. In particular, BreadTalk’s better YoY results have proven its improved growth prospects, which should potentially warrant a more optimistic view from us. The usual company-specific headwinds on costs arising from labour and FX translation losses are expected to remain; hence we like companies that have been showing stable margins such as Petra Foods and Sheng Siong Group. Overall, consumer staples continue to be favored over consumer discretionary; and Sheng Siong Group [BUY; S$0.77 fair value] appeals for its defensive business and management’s track record of sound execution.

Source: OCBC Research - 12 Dec 2014