Broker's take: RHB 'overweight' on consumer stocks with ThaiBev as top pick

IN view of consumption trends in a post-Covid-19 world, RHB has upgraded the consumer sector under its coverage to "overweight", from "neutral".

The research team prefers staple-food companies with exposure to a domestic recovery play, while beer and liquor giant Thai Beverage Public Co (ThaiBev) is its top pick for the sector in 2021.

RHB also likes names such as supermarket chain Sheng Siong Group, retailer Dairy Farm International, coffee-shop operator Kimly and instant-coffee maker Food Empire Holdings.

In a strategy note on Tuesday, analyst Juliana Cai wrote that consumer companies with exposure to the reopening of domestic activities, such as those in retail and food and beverage services, should see some earnings recovery next year, from a low base in 2020.

"Local demand would also be supported by an increase in savings arising from travel restrictions, pent-up demand and consumers becoming more accustomed to distancing themselves from Covid-19 risks," she said.

In addition, many firms have restructured their operating expenditures to make them more variable, through higher gross turnover rents and lower base rental rates, as well as using more casual labour. These initiatives will mitigate the surge in expenses when revenue grows, according to Ms Cai.

Moreover, she expects sub-sectors such as e-commerce, home furnishing, sports and recreational retail, online entertainment and grocery retail to continue to benefit if stay-at-home trends prevail after the pandemic.

On the other hand, RHB remained cautious on tourism-related stocks. It is "neutral" on Genting Singapore with a S$0.72 target price, and recommended "sell" on Jumbo Group with a S$0.19 target.

Firms heavily dependent on tourism may see an uptick in revenue for Q4 2020 and Q1 2021 on the back of holidays and festive demand. However, Ms Cai believes the recovery in tourist numbers over the next 12 months will be slow, given the uncertainty on the mass distribution of the Covid-19 vaccines.

On ThaiBev, RHB has a "buy" call and S$0.82 target price. The stock was trading at 73.5 Singapore cents as at 10.05am on Tuesday, up 0.5 cent or 0.7 per cent.

The research team likes ThaiBev's earnings defensiveness - derived from the spirits segment - coupled with a potential recovery play from its exposure to on-premise consumption through its beer, non-alcoholic beverages and restaurant segments.

ThaiBev's spirits segment caters largely to off-premise local consumption, and has wide exposure to the upcountry region. This means the segment has been less affected by social-distancing restrictions during the Covid-19 pandemic as well as the protests in Bangkok, said Ms Cai.

RHB also likes Sheng Siong for its sustained high gross profit margin, operational efficiencies and high free-cash-flow generation.

The research team on Tuesday rated the grocery staples retailer a "buy" with a S$1.87 target price. Sheng Siong's shares were trading flat at S$1.54 as at 10.05am.

Although investor interest in grocery retailers has moderated after the Covid-19 lockdown ended and encouraging vaccine development news emerged, the work-from-home trend and travel restrictions may remain in place till late 2021, according to Ms Cai.

In that case, Sheng Siong's shares may stay buoyed and even exceed levels prior to the pandemic, thus bringing about an upside surprise, she added.

Meanwhile, Kimly's net profit is set to see a further boost from new joint ventures and acquisitions, said another RHB analyst, Jarick Seet, in a company update on Tuesday.

He maintained his "buy" call on the coffee-shop operator and raised the target price to S$0.34. The counter fell 0.5 Singapore cent or 1.6 per cent to trade at 30 cents as at 10.06am.

Kimly's business model has shown resilience, with revenue rising 1.2 per cent and net profit growing by 25.8 per cent for its fiscal year ended Sept 30, 2020, although this strong showing was also partially due to government support, said Mr Seet. RHB expects Kimly's dividends to remain attractive at about 4.2 per cent for FY21.

As for Dairy Farm, RHB has a "buy" call and US$4.47 target. The stock's valuation is "undemanding", as it was trading at a 19-time FY21 price-to-earnings ratio, compared to its historical average of 24 times. Its shares gained US$0.03 or 0.7 per cent to US$4.09 as at 10.06am.

Dairy Farm operates supermarkets such as Cold Storage and Giant, 7-Eleven convenience stores, home furnishing retailer Ikea, health and beauty stores such as Guardian and Mannings, as well as restaurants.

RHB noted that the continued wave of Covid-19 infections in Hong Kong is likely to weigh down Dairy Farm's near-term prospects, as it will slow the recovery of its health and beauty division and its restaurants. "Nonetheless, we think its current valuation presents a good opportunity for long-term accumulation, especially given the positive news on vaccine development," Ms Cai said.