Following a year of relative underperformance and caution investing, the consumer sector is heading towards a more optimistic outlook in 2018. So far, Singapore has been weak with consumer staples underperforming and consumer discretionary remaining flat. However, DBS has singled out Singapore for its laggard performance as a key driver in 2018.
Consumer Sector: Look Out For Improving Macroeconomic Outlook, Margin Expansion
One of the key drivers of the consumer sector will be the improving macroeconomic outlook. DBS economists expects 2018 to perform even better than 2017, having tailwind that will carry Asia into a strong start in 2018. As such, DBS foresees better earnings growth driven by topline improvements. This is also driven by the bottoming of margins, which should drive margins upward in 2018.
Investors Takeaway: DBS’ Strategy Recommends BreadTalk Group and Thai Beverage Public Company
On a 10-year basis, DBS notes that valuations appear to be high for the sector. Given investors’ preference for secular growth story, particularly rising affluence and urbanisation, DBS recommends looking at consumer stocks with potential for upward earnings revisions. DBS prefers stocks that have strong positions in their domestic markets, which will help them benefit from growing domestic consumption.
1. Thai Beverage Public Company
Thai Beverage Public Company’s (ThaiBev) exposure in Thailand is a plus point for DBS. Its resilient and dominant Spirits operations will continue to support the bulk of the group’s cashflow. The mourning period has been clouding outlook for Thaibev in the past year. However, with the mourning period now passed, uncertainties surrounding slower consumption should no longer be a concern. From a longer-term perspective, ThaiBev’s ongoing transformation into a regional beverage player will help to further catalyse the stock.
Its recent acquisition of Grand Royale, the dominant whisky player in Myanmar, has helped it extend its presence further outside of Thailand. ThaiBev’s associate, Fraser & Neave (FNN) now owns 19 percent in Vinamilk, and has indicated an intention to increase this further. ThaiBev has also bought a significant stake in Sabeco, Vietnam’s market leader in beer, from Vietnam’s Ministry of Industry and Trade. Moving forward, DBS highlights that any pullback in share price is a chance to accumulate.
BUY, TP $1.07 (Current share price: $0.915)
2. BreadTalk Group
BreadTalk Group (BreadTalk) has been consolidating its underperforming outlets to drive up its margins. DBS continues to be positive on BreadTalk’s outlook as its growth drivers remain intact. Furthermore, DBS notes that a turnaround in the Bakery division led by store growth and better profitability indicators in 3Q17 results, suggest that earnings will continue to be driven in 2018.
Post restructuring of Bakery franchisees in China in 2017, DBS expects store openings and revenue growth to resume from FY18 onwards. Efficient management of Food Atrium Business post removal of non-performing food courts in China will also contribute to earnings growth for BreadTalk. The sale of stakes in properties such as CHIJMES and AXA Tower would also help to unlock shareholder value if they materialise, according to DBS.
BUY, TP $2.01 (current share price: $1.67)