KUALA LUMPUR (March 27): Staples and value retailers are some of the picks in the retail sector that stand out amid a fresh wave of earnings downgrades triggered by the Iran-Israel conflict, said MBSB Research.
The house named 99 Speed Mart Retail Holdings Bhd (KL:99SMART), Leong Hup International Bhd (KL:LHI) and MR DIY Group (M) Bhd (KL:MRDIY) as its favourites, given their strong value-driven models and staple product exposure.
"Leong Hup International for its defensive exposure to staple protein demand, MR DIY for its resilient value-driven retail model and procurement scale advantages, and 99 Speedmart, which stands to benefit from downtrading behaviour and remains well insulated through its centralised logistics platform," MBSB said in a sector report on Friday.
The house maintained its positive stance on the consumer industry, even as it transitioned to a "tension case" scenario that saw earnings cuts of 1.0% to 8.0% across its coverage.
“We have applied our tension case assumptions as the new earnings base, reflecting a six-week contained conflict that lifts oil to US$90/bbl on a full-year average, with varying degrees of cost pass-through across our coverage,” the research house said.
While the Middle East escalation introduced tangible cost headwinds, including elevated freight, fertiliser, and packaging costs, domestic consumption fundamentals remain intact.
These are supported by stable employment, manageable core inflation, and continued government support for Malaysians via initiatives like the STR and Sara.
The research house noted that the impact of the conflict varies by subsector, with poultry producers facing higher feed costs, while retailers and F&B operators grapple with landed merchandise costs and potentially weaker discretionary spending.
MBSB has 'buy' calls on PPB Group Bhd (KL:PPB), MR DIY and Life Water Bhd (KL:LWSABAH) with target prices (TP) of RM12.20, RM2.13 and RM1.34 respectively.
Conversely, discretionary-heavy and margin-sensitive players were flagged as the most exposed.
Padini Holdings Bhd (KL:PADINI) with a TP of RM2.13 that faced the steepest earnings revision of -8.0%, followed by AEON Co (M) Bhd (KL:AEON) at RM1.47 amounting to -6.5% and Hup Seng Industries Bhd (KL:HUPSENG) with a TP of RM1.09 at -6.4%.
“Importantly, these are prudent adjustments to reflect near-term cost reality rather than a change in our fundamental view on the sector,” MBSB added.
However, it warned of further downside risks under supply pivot or market shock scenarios, which could imply materially larger earnings cuts if the conflict persists or escalates further.