South East Asia Industry Focus
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South East Asia Industry Focus ASEAN Consumer: Food for Thought Issue #09/16 Refer to important disclosures at the end of this report DBS Group Research . Equity 9 December 2016 STI : 2,958.86 Peering through an ice-frosted glass KLCI : 1,619.12 2016 projected to close strong, unlike 2015 SET : 1,510.24 Earnings outlook for 2017: more cautious on higher JCI : 5,148.91 expectations PCOMP : 6,781.20 Rising commodity prices could present downside earnings risks, from 2Q17 onwards Stock picks: still sticking to visible earnings, domestic Analyst drivers, growth and specific catalysts Andy SIM CFA +65 6682 3718 [email protected] 2016 to close nicely. Recent 3Q16 results showed an uptick in earnings disappointment from 2Q16, though insignificant. Alfie YEO +65 6682 3717 Going into 4Q16, we project the earnings momentum to [email protected] remain steady; and aggregate profit growth for FY16F will end at c.12%, accelerating from the 2% seen for FY15. The King Yoong CHEAH +60 32604 3908 [email protected] growth drivers continued to be Thailand, Indonesia and Philippines companies. That said, the pace of gross margin Namida ARTISPONG +66 2657 7833 improvement has somewhat slowed in 3Q16, in line with our [email protected] earlier expectations, as positive effects of low raw material Tiesha PUTRI +62 21 3003 4931 prices wear off. [email protected] More cautious on 2017 projections. Our bottom-up Reuben Mark ANGELES projections show an aggregate net profit growth of 12% for our regional consumer coverage. But, unlike a year back when we were more optimistic for 2016 after a dismal 2015, we are STOCKS PICKS now more cautious. For one, expectations are higher vis-a-vis a 12-mth Performance (%) year back. Secondly, we see higher level of uncertainties on Price Mkt Cap Target the macro front in the year ahead – pace of Fed hikes, US Price trade policies, etc, that could affect fund flows. Valuations for LCY US$m Local 3 mth 12 mth Rating ASEAN consumer sector are still around +1SD above average Thai Beverage 0.86 15,202 1.09 (11.8) 26.5 BUY despite recent correction. Public Company Watch out for margins, earnings downside but ASEAN CP ALL 60.25 15,197 75.00 (0.4) 40.1 BUY companies remain cash rich. Raw material prices are on the Indofood Sukses 7,875 5,204 9,900 (7.6) 53.7 BUY rise. We continue to keep an eye on margins and believe this Makmur could present downside risks on profits if top line fails to pick up as expected. That said, consumer companies under our Sheng Siong 1.01 1,072 1.19 (4.7) 18.1 BUY coverage largely remain in net cash or are lowly geared. This Group Ltd provides inorganic growth opportunities and could be an Robinsons Retail 74.00 2,065 92.00 (5.1) 7.3 BUY added catalyst. Holdings Stock picks: domestic plays, resilient and specific catalysts. In Source: Bloomberg Finance L.P., DBS Bank, DBS Vickers, First Metro light of the current outlook, we would stick to counters relying Securities on domestic drivers and resilient growth. Sheng Siong is still a Closing price as of 7 Dec 2016 pick given resilient earnings. We like CPALL for its strong growth profile driven domestically, while ThaiBev is preferred for its dominant position and potential restructuring story through FNN. We still like Indofood Sukses Makmur given its decent valuation, growth, and potential for its sum-of-parts discount to narrow with the divestment of China Minzhong. We include Robinson Retail Holdings, projecting an improvement in earnings and margins in FY17F. ed-TH / sa: SM, PY South East Asia Industry Focus ASEAN Consumer: Food for Thought Table of Contents Overview: Peering through an ice-frosted beer glass 3 Regional and Country 12-month forward PE 14 Performance Review and Regional Benchmarks 15 DBS ASEAN Consumer Stock Universe Performance 17 Same-store-sales-growth charts 18 Country briefings Singapore 23 Malaysia 26 Thailand 30 Indonesia 33 Philippines 36 Macro Charts/ Data GDP 41 Inflation 42 Forex 43 Input costs 44 PE & PB trading band charts 46 Peer comparison 56 Company Guides Thai Beverage Pcl 59 CP ALL Pcl 71 Indofood Sukses Makmur 78 Sheng Siong Group 86 Robinson Retail Holdings 93 Appendix 102 Page 2 South East Asia Industry Focus ASEAN Consumer: Food for Thought Overview: 2017 Outlook – Peering through an ice-frosted beer glass 2016 review – “hopeful servings” turned out better than Fed hikes, US trade policies, etc, that could affect fund flows. expected. Looking back at 2016, the year has seen a much Valuation for the ASEAN consumer sector is still around +1SD better outcome than in 2015. Our recurring theme in 2015 above average despite the recent correction. was cautiousness, premised on overly high expectations. We transited into this year by being “Hopeful for better 2016 Raw material prices are on the rise. We continue to keep an servings”, calling for more “risk-on” trades in the later part of eye on margins and believe this could present downside risks the year. We started by being positive on Philippines in the lead on profits if top line fails to pick up as expected. That said, up to the Presidential election, but sought to “stay close to the consumer companies under our coverage largely remain in net exit given the uncertainties thereafter”. We also stated our cash or are lowly geared. This provides inorganic growth opportunities and could be an added catalyst. preference for Thailand and Indonesia on the back of their stimulus package. Both were the outperformers within the To surmise, our regional consumer outlook for 2017 is akin to region. peering through an ice-frosted beer glass, just taken out from the freezer. It looks opaque at this juncture. We need the 2017 outlook: peering through an ice-frosted beer glass. room temperature to thaw off the frost for a clearer outlook. Compared to 2016, we are not as optimistic at this stage. Thus, our strategy is still to stick to companies with resilient While our bottom-up projections show an aggregate net profit earnings, rely on domestic demand and specific potential growth of 12% for our coverage, expectations are now higher catalysts. vis-a-vis a year back. In addition, we see higher level of uncertainties on the macro front in the year ahead – pace of Figure 1: DBS Food for Thought series in 2015; summary and key points Issue # Date Title Key points 09/16 9-Dec-16 2017 Outlook: Peering through Uncertainties prevail and outlook is akin to be gazing from a frosted beer glass. Look an ice-frosted beer glass out for margin contractions while valuations are still high vs historical standards. Stick to domestic and defensive plays in view of nationalistic trend. Potential catalysts are M&A. 08/16 4-Oct-16 Good but servings getting rich Performance of consumer companies good thus far, but valuations getting rich at +1SD above average. Earnings surprise came from margin expansion; and one should look out for moderating margins going forward, particularly in 4Q16 or 1Q17. 07/16 25-May-16 Positive start to 1Q; steady 1Q earnings in line, with more robust 2016 earnings projections. Picks are staple plays plays that remain resilient on back of our views of higher volatility. 06/16 24-Mar-16 Servings are on course Projecting 10% growth for 2016 and expect an improved sentiment, following from cautiously optimistic stance for 2016. 05/15 26-Nov-15 Hopeful for better 2016 Cautiously optimistic for 2016; more conservative with safer picks in early part and servings moved on to more risk-on trades in the later part of year on confirmation of higher GDP growth. 04/15 25-Sep-15 Watch your diet Reality did bite, share prices came off; earnings cuts; less cautious but not time to go all out as sentiment remains soft. 03/15 23-Jul-15 Reality bites Macro factors, softer sentiment seen flowing down to earnings to upcoming 2QCY15 earnings season; expected reality to bite; stocks moderated but not time to bottom-fish. 02/15 25-May-15 Moderate your appetite Witnessed high percentage of earnings disappointment; macro data, consumer sentiment and currency volatility point to further earnings cuts. 01/15 20-Mar-15 Stability in Staples ASEAN consumer stocks look pricey on valuations; potential risks are stronger USD, higher opex; go for staples. Source: DBS Bank Page 3 South East Asia Industry Focus ASEAN Consumer: Food for Thought 3Q16 earnings review Companies in Thailand, Indonesia and Philippines saw no significant variances in their earnings performance. The main Some uptick in disappointments compared to 2Q16. With the rise in earnings disappointment came mainly from Malaysia good showing in 1H16 from the results reported back in companies. This arose from higher-than-expected operating August, it seems that expectations were raised back then. In costs for OldTown and QL Resources, while the effects of the 3Q results season, there has been some uptick in higher-priced imported inventories affected Padini and MSM. disappointments. Overall, about half of our regional coverage results came in within our expectations, while 28% were Over in Singapore, the key misses were from ThaiBev, Delfi and below expectations. The remaining 22% of companies Super. Disappointment in ThaiBev is likely to be temporary, in reported above-expected results. our view, given the higher accruals from staff bonuses and higher market expenses. This came about from a shift in its This compares to 2Q16, which was a good quarter where we financial year-end. For Delfi, while gross margins surprised us, saw 85% of our coverage coming in within and above our sales growth was lacklustre particularly given its weak 2H15.