PETALING JAYA: Not unlike last year, inflation will remain consumers’ top concern this year, especially with the ongoing subsidy rationalisation measures and consumption taxes.

       Pending more clarity on the impact of subsidy rationalisation, investor sentiment on the consumer sector would remain muted, said RHB Research.

       “As a result, our economists are projecting modest 2024 private-consumption growth of 3.3% year-on-year and a pick-up in inflation to 3.3%.

       “That said, we believe consumer spending, while unexciting, will be supported by the stable employment market and continued government assistance given to the lower-income groups,” said the research firm in a report.

       RHB Research said it expects lacklustre sales volume growth for most of the consumer companies under its coverage.

       “This environment will also cap any average selling-price growth, so we believe there will be limited headroom for gross profit margins to expand.”

       According to the research firm, the current valuations of stocks have largely priced in the downside risks and its base case does not assume that subsidy rationalisation will significantly dampen consumer spending.

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       “Notwithstanding the uncertainty around subsidy rationalisation, we are not turning negative on the sector, as the depressed price-to-earnings ratios for the sector indicates that the downside risks are in the prices.

       “Our base case also does not assume an overly bearish scenario where reduced subsidies significantly hurt consumer spending.

       “This is premised on the continued assistance extended by the government to lower-income earners and relatively inelastic demand in the higher-income group,” the research house added.

       RHB Research said the adoption of a targeted subsidy-rationalisation approach will put more money into the pockets of the lower-income earners, who have a higher marginal propensity to consume.

       This should benefit players like Nestle (M) Bhd, MR DIY Group (M) Bhd, Farm Fresh Bhd and Padini Holdings Bhd.

       Furthermore, a stronger fiscal position from the reform initiatives could give the government better leeway in reviewing the salary scheme for civil servants, which is ongoing. A positive outcome could serve as a major catalyst to boost consumer spending, said the research house.

       Among stocks under its coverage, RHB Research said it continues to like MR DIY for its value-for-money product offerings and sticky demand, which should underpin its robust earnings growth above the sector average as well as its continuous network expansion.

       “We also like DXN Holdings Bhd for its attractive valuation and exciting growth prospects, with its imminent entry into Brazil and Argentina. Guan Chong Bhd may see a strong turnaround in the financial year 2024 on a potential normalisation of cocoa bean prices.

       “We also like both the breweries for their undemanding valuations and circa 6% dividend yields, backed by the relatively inelastic demand for their products,” said the research firm, which is “neutral” on the overall sector.

       It said the downside risks to its sector weighting is if the impact from the ongoing reforms are more severe than expected and should there be a sharp rise in companies’ operating costs.