Sheng Siong, Delfi among Asean winners from inflationary pressures: DBS

DESPITE the overhanging pressures from an inflationary economic environment, several retailers with exposure in Indonesia and Thailand have surprised with higher revenues year on year due to higher sales and the ability to pass on higher costs to consumers.

However, this had only partially mitigated the effects of inflation as gross margins softened. While commodity prices have retreated in the recent months, the positive effects on margins will likely only be seen by Q4 this year or early 2023 due to lagged effect of pass through.

For this reason, DBS in its report on Wednesday (Aug 31) selected its top picks in the consumer sector based on 3 themes: safer staple companies benefiting from inflation and/or its ability to pass on costs, reopening and domestic recovery as well as those with earnings upside surprises with valuation below its historical average.

Of Asean’s consumer staples, the research house likes Sheng Siong as they maintained a “buy” with a target price of S$1.76 on the stock. This comes as Sheng Siong’s earnings were largely in line with DBS’ expectations for H1 2022, and analysts believe a silver lining for the grocery players could come from a shift towards in-home consumption to combat surging prices amid the climbing core inflation.

DBS analysts were also optimistic on Indonesian consumer Delfi over the strong sales and margins it reported in its half-year results this year. They raised their forecasts on the group’s FY22 and FY23 earnings by 23 per cent and 16 per cent, respectively, while maintaining a “buy” call on the counter with a target price of S$1.31.

Potential buys among discretionary companies in the region include Indonesia retailer Mitra Adiperkasa as well as Thailand’s Siam Wellness. The analysts liked these 2 companies as they noted a better-than-expected performance on the back of reopening and easing restrictions in their respective geographies.

Mitra has a “buy” recommendation from DBS with a target price of 1,240 rupiah (S$0.12).

“With economies and governments learning to cope with Covid-19 and restrictions fast easing, there is optimism with improving consumer sentiment,” said the analysts in their report.

DBS economists also expect most Asean economies, save for Singapore, to register gross domestic product (GDP) growth at a faster clip compared to 2021.

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However, the impact of inflation on consumer demand is still worth noting, they added.