Bargains drive demand as margins face pressure
This was despite the sector providing a defensive shelter amidst the uncertain global macroeconomic outlook, thanks to the domestic-centric earnings base and resilient consumption on stable employment and continuous financial support.
In a report, RHB Research said the prospects of subdued consumer sentiment and rising operating expenditure (opex) will cap earnings growth.
'Therefore, we strategically advocate for the liquid large-cap retailers with better earnings visibility, backed by superior operational scale and efficiency. We maintain a 'neutral' call,' RHB Research said.
It added that moving past the immediate term, it foresees consumer sentiment staying soft, impacted by elevated inflationary pressures as well as uncertain economic and income outlooks stemming from global trade tensions.
'As such, inflation-weary consumers will continue to spend selectively, prioritising essential purchases and bargain-hunting for value, hence capping discretionary spending,' it noted.
RHB Research said it prefers defensive and liquid large-cap names like MR DIY Group (M) Bhd and 99 Speed Mart Retail Holdings Bhd for their ability to capture consumer spending and reasonable valuations versus consumer staple peers.
The research house also likes Farm Fresh Bhd for its ambitious drive to penetrate more segments in the dairy industry and favours Guan Chong Bhd for its stellar earnings outlook, supported by forward sales at elevated combined ratios and normalised production volumes.
'We also highlight Focus Point Holdings Bhd 's undemanding valuation, notwithstanding the robust optical sales momentum on the back of the rising myopic population and proactive marketing drive.'
On the sales and service (SST) tax, RHB Research said it does not reckon companies will be able to pass on the additional costs considering the demand elasticity and anti-profiteering regulation in place.
With that, it opined that margin trends could turn subdued, particularly for retailers like Aeon Co (M) Bhd, Padini Holdings Bhd , Mynews Holdings Bhd and Focus Point, unless there are significant efficiency gains to offset the impact.
'On the other hand, things are turning more favourable for food manufacturers like Nestle Malaysia Bhd , Farm Fresh and Power Root Bhd as easing commodity prices and strengthening of the ringgit should translate to a promising margin outlook.'
Risks include a major slowdown in economic growth and a sharp surge of commodity prices.
'We believe they can better mitigate opex inflation owing to their dominant market share, massive scale of operations, and established brand equity,' it said.
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