• Valuations still reasonable
• Emerging markets offer good growth
• No change to preferred pick

Broadly reasonable valuations

The year started off on a broadly positive note, with the STI up 5.8% YTD, while the FTSE Consumer Goods Index and FTSE Consumer Services Index were up 3.9% and 1.1%, respectively. In our latest sector report in Nov- 16, we noted that the consumer sector saw a series of privatisations and acquisitions, suggesting valuations have been generally reasonable. In the past month, Viz Branz is reportedly seeking to re-list on SGX and the potential listing of a Malaysian F&B player offer further testament to an attractive consumer space.

Companies looking towards emerging markets for growth

Against this backdrop of inexpensive valuations and sound long term growth fundamentals for Asia, consumer companies are looking beyond China and focusing on emerging markets for expansion plans. In the past month, Jumbo [non-rated] had entered into its first franchise agreement to bring its brand to Vietnam, and its first Jumbo Seafood outlet is expected to open in Ho Chi Minh City in mid-17.

QAF had also indicated expansion plans in the Philippines, including setting up of new bread manufacturing plants to cater to the growing demand for bread products in the Philippines. According to Euromonitor International, the group’s Gardenia remains a leading company in baked goods for Philippines, holding a 13% market share in retail value terms vs. 10% for Goldilocks Bake Shop.

Unlocking value for shareholders

Besides keeping an eye on companies’ expansion plans, within our coverage for the sector, we often highlight Sheng Siong Group and QAF for their stable dividends and decent yield of 3-4%. In addition to this, we highlight that BreadTalk Group holds a few strategic investments, and most recently unlocked value from another property. As part of a consortium led by Perennial Real Estate Holdings, they had announced a divestment of investment in TripleOne Somerset, following which they would record a gain of S$9.3m from the divestment before transaction costs.

Last year, the group had given out special dividends totaling S$3.8m, which represented ~45% of the divestment gain from another property, 112 Katong. In a similar vein, we think it is likely that shareholders can look forward to special dividends after 1Q17. We keep in mind that the group still holds other strategic investments such as stakes in CHIJMES and AXA Tower.

Maintain neutral

With 4QCY16 results coming in this month, we maintain our NEUTRAL view for the sector and reiterate our call on Sheng Siong Group [BUY, S$1.15], particularly at current price levels, for the company’s management strength and largely stable, cash generative business.

Source: OCBC Research - 1 Feb 2017