This article first appeared in The Edge Malaysia Weekly on November 11, 2024 - November 17, 2024

DISCRETIONARY consumer businesses are likely to be the most affected by the impending rise in operating costs next year as they have less leeway to pass on the increase compared with those supplying basic necessities, analysts say.

Looming ahead in 2025 are the hike in the minimum wage to RM1,700 per month from RM1,500 as well as the planned subsidy rationalisation for RON95. Throw in the still-weak ringgit and change in consumer pattern to buying more discretionary items, including clothing and white goods, online and companies in this business may well see lower margins.

“At this point in time, consumer retail players are unlikely to pass on the higher cost to customers because consumer sentiment is on the mend, so they would want to benefit from that in terms of volume. It’s fair to expect some crimping of margins,” says an analyst with an international research firm who declines to be named because of company policy.

Data from the Department of Statistics Malaysia shows that retail trade sales value did not grow significantly after previous hikes in minimum wage. In June 2022, total retail trade sales was RM56.15 billion compared with RM56.02 billion in the previous month, after the minimum wage was hiked to RM1,500 per month. The 0.2% month-on-month increase continued for the rest of 2022 at a low single-digit growth.

However, not all discretionary consumer businesses face the same challenges.

Take Berjaya Food Bhd (BFood) (KL:BJFOOD), which has been affected by the Israeli agression in Gaza that began last October. The subsequent boycotts of corporations with alleged ties to Israel led to the boycott of BFood’s Starbucks outlets in Malaysia, badly hurting the company.

In the financial year ended June 30, 2024 (FY2024), BFood registered a net loss of RM91.52 million, as revenues plunged 35% y-o-y. Analysts expect more red ink in the current financial year.

For discretionary consumer businesses not facing widespread boycotts, investors need to consider factors such as their nature of business, dividend payout and yields as well as cash levels.

“The retail names that can afford to do cost pass-throughs would opt to do so but these would be the names that offer necessities and whose products are more sticky in demand. So think Mr DIY with its household basics and AEON with its groceries.

“Being mindful of the nature of the retailer’s business is key. We are cautious on names like Padini and even more so now on BFood given the highly discretionary nature of their business,” says another retail sector analyst.

Despite registering a 5.3% rise in revenue to RM1.92 billion, Padini Holdings Bhd (KL:PADINI) posted a 34.2% y-o-y drop in net profit to RM146.6 million for FY2024 as it reported a 30.1% decline in operating profit and profit before interest and tax.

The group attributed its weaker performance to a decline in gross profit margin to 36% from 39%, as well as higher staff costs during the year. Both factors are expected to persist in FY2025 for most retail businesses.

“Retail business in general remains challenging due to the deterioration of purchasing power arising potentially from the rising cost, trade tensions and rising inflation and interest rates,” Padini said in notes to its financial results for the final quarter of FY2024.

BIMB Securities retail analyst Sabrina Azrin does not believe Padini’s operating costs will increase in FY2025.

“In FY2024, Padini’s bottom line was hit by the higher input cost along with rising staff costs. We believe the increase in minimum wage to RM1,700 starting January 2025 won’t impact Padini significantly as Padini has already been paying above the new minimum wage due to the competitive salaries in the industry,” she says in response to questions from The Edge.

In a note dated Aug 29, CIMB Securities says Padini believes the upcoming increase in the minimum wage and civil service salaries will be net positive for the group, given its target market is the mass market segment.

CIMB Securities has maintained a “buy” call on Padini with a target price of RM3.85, pegged to 14 times 2025 forecast earnings. It notes that Padini’s valuation is attractive, at 11.8 times its one-year forward price-earnings (PE), and a 15.6% discount to its 10-year mean PE.

Padini’s cash balance is quite large, and it has fairly low liabilities, resulting in a net cash position. As at June 30, 2024, its cash and bank balances stood at RM791.04 million, 30.7% higher compared with the previous year. The group has zero debts or borrowings. The biggest portion of its liabilities is leasing liabilities, totalling RM550.42 million as at June 30, 2024.

But will investors be swayed by huge cash reserves?

“War chests really don’t mean much for the time being, especially if there’s no intention to pay out special dividends. Any pickup in [business] expansion might also be met with slow traction in the current environment,” says an analyst The Edge spoke to.

Sabrina of BIMB Securities says a net cash position is attractive as it indicates financial stability and prudent management.

“Having net cash means that the company will most likely be able to withstand economic downturns and invest in growth opportunities without reliance on debt. This can be especially appealing in uncertain market conditions, as it may indicate a lower risk for investors,” she explains.

Padini was trading at RM3.54 last Thursday, 0.85% higher than at the start of the year. It reached a YTD peak of RM3.90 on May 27, and trough of RM3.21 on Aug 6. At the current level, the company is trading at a trailing 12-month (TTM) dividend yield of 2.83%. 

A dividend yield play is a good angle to consider, says the analyst at the international firm. “We advise investors, if they really want to buy retail names, to also prioritise the ones with healthy dividend payouts.”

Adds BIMB Securities’ Sabrina: “Stocks with a high dividend yield level are attractive to investors who are anticipating a steady income flow from dividends, and those who anticipate a positive total return and [for dividends to] act as a buffer against price declines or volatility.”

Several consumer discretionary stocks offer healthy dividend yields at their current price levels.

Bonia Corp Bhd (KL:BONIA) was trading at a trailing 12-month dividend yield of 5.3% at last Thursday’s closing price of RM1.50. The counter is down by 17.13% YTD, and valued at a TTM PE multiple of 8.92 times.

Bonia has also been hit by higher costs. In FY2024 ended June 30, it recorded a net profit of RM33.8 million, compared with RM55 million in FY2023, as revenue dipped 2.5% while selling and distribution expenses rose 9%.

However, it managed to keep its cost of sales in check as Malaysia chalked up higher sales, although the overall numbers were dragged down by Singapore and Indonesia.

In FY2024, Bonia paid out total dividends of 12 sen per share, which translates into a dividend yield of 8%, compared with 18 sen per share in FY2023.

With its profitability on a declining trend over the last three consecutive quarters, and the challenging outlook in FY2025, there is no guarantee that the group will continue to declare consistent dividends.

Other consumer discretionary counters offering a good dividend yield include Focus Point Holdings Bhd (KL:FOCUSP), which is trading at a TTM dividend yield of 4.2% as at last Thursday’s closing price of 78 sen, and Only World Group Holdings Bhd (KL:OWG).

Public Investment Bank initiated coverage on Focus Point with an “outperform” call and a target price of RM1.

In its Oct 3 note, Public IB says Focus Point’s valuation is attractive, as it is trading at 8.8 times forward PE, slightly below its average five-year historical forward PE.

OWG, an entertainment outlet and restaurant operator, was trading at a dividend yield of 5.19% as at last Thursday’s closing price of 39 sen.

Its share price has declined 18.09% YTD. The group slipped into the red with a net loss of RM905,000 in the fourth quarter ended June 30, 2024, as its cost of sales increased 31.4% y-o-y. 

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