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Broker's take: RHB picks Food Empire, Dairy Farm as top consumer plays for 2018

ANALYSTS at RHB are expecting domestic spending in Singapore and the region to pick up in 2018, reversing the past three years' muted consumer sentiment.

The increased optimism among consumers comes on the back of Singapore's 2017 GDP (gross domestic product) growth hitting the higher end of economists' estimates - at 3.5 per cent.

In addition, improving job prospects, a higher wealth effect from rising property prices and stock market performance have also boosted consumers' confidence, the analysts said.

Following comments by Prime Minister Lee Hsien Loong that Singapore will be raising its taxes as government spending grows, economists and analysts have suggested that a GST (goods and services tax) hike could be on the horizon as the current rate of 7 per cent is relatively low compared with other countries in the region.

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While RHB does not expect the GST rate to be increased, it noted that if a hike is proposed, it might prompt consumers to plan purchases before it takes affect, which might have an effect on domestic spending.

With the upcoming World Cup in Russia, RHB also expects the sales of snacks, takeaway foods, as well as alcoholic and non-alcoholic beverages to increase during this period. "Regional alcohol players" could also see a surge in sales volumes in June and July this year.

Consumer cyclical stocks with exposure to the Singapore market, such as Cortina and Hour Glass, or food and beverage players such as RE&S, BreadTalk, No Signboard and Jumbo may also benefit from an improved consumer sentiment - thus experience an uptick in same-store sales growth this year, the analysts noted.

RHB's top stock pick for the consumer segment is Food Empire; with over 40 per cent of its revenue from operations in Russia, the broker sees it benefiting from the uplift in economic activity during the World Cup period.

"We also like management's execution capabilities to diversify into the markets in Asia and into the food ingredients business," they added.

RHB has recommended a "buy" call on Food Empire with a target price of S$1.

RHB's other pick - Dairy Farm - may also benefit from the pick-up in consumer sentiment across the region, which could boost the group's supermarket operations.

"Moreover, it stands to gain from other higher-margin segments, that is, health & beauty and home furnishing could continue to hold up," RHB said.

The analysts have also issued a "buy" call on the stock with a discounted cash flow-derived target price of US$9.53.