RHB upgrades Singapore consumer stocks to 'overweight'

Singapore

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

Among Singapore-listed stocks, the research team prefers staple-food plays with exposure to domestic recovery, while beer and liquor giant Thai Beverage Public Co (ThaiBev) is its top pick for the sector in 2021.

RHB also favours 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, should see some earnings recovery next year, from 2020's low base. "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, lower base rental rates and using more casual labour. These initiatives will mitigate the surge in expenses when revenue grows, said Ms Cai.

On the other hand, RHB remained cautious on tourism-related stocks such as Genting Singapore and Jumbo Group. Firms reliant on tourism may see a revenue uptick in Q4 2020 and Q1 2021 amid the holidays and festive demand, but 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, Ms Cai said.

On ThaiBev, RHB has a "buy" call and S$0.82 target, citing its earnings defensiveness - derived from the spirits segment - coupled with a potential recovery play from 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.

OCBC on Tuesday also maintained its "buy" rating on ThaiBev, while increasing its fair-value estimate to S$0.89, following the group's better-than-expected sales volume and lower costs. Besides, its valuation is "undemanding" given the vaccine developments, ThaiBev's strong brand name and portfolio, and government stimulus, OCBC said.

RHB likes Sheng Siong for its sustained high gross profit margin, operational efficiencies and high free-cash-flow generation. The analyst rated the grocery staples retailer a "buy" with a S$1.87 target price.

Although investor interest in grocery retailers has moderated following the Covid-19 lockdowns and encouraging vaccine development news, the work-from-home trend and travel restrictions may remain in place till late 2021. In that case, Sheng Siong's shares may stay buoyed and even exceed levels prior to the pandemic, according to Ms Cai.

Meanwhile, Kimly's net profit is set to see a further boost from new joint ventures and acquisitions, said another RHB analyst, Jarick Seet. He maintained his "buy" call and upped the target price to S$0.34.

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, said Mr Seet. He expects Kimly's dividends to remain attractive at 4.2 per cent for FY21.

As for Dairy Farm, RHB deemed its valuation "undemanding", as its shares were trading at a 19-time FY21 price-to-earnings ratio, compared to its historical average of 24 times. Dairy Farm's portfolio includes Cold Storage and Giant supermarkets, Ikea, 7-Eleven, Guardian and restaurants.

RHB foresees Hong Kong's continued Covid-19 infections weighing on Dairy Farm's near-term prospects, slowing the recovery of its health and beauty division and 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.