Petaling Jaya: Consumer staples companies are expected to face increased margin pressures, driven by the surge in commodity prices and worsened by the Russia-Ukraine war.

       To help mitigate some of the impact, these companies are expected to raise selling prices and pass on some of the costs to consumers.

       According to CGS-CIMB Research, all the consumer staples companies under its coverage have progressively raised their product prices throughout the fourth quarter of last year and into the first quarter of 2022.

       “However, any further increase in selling prices will likely be gradual and only happen in the second half of 2022 to ensure products remain affordable,” it said in a recent report.

       The research house recently conducted a sensitivity analysis to understand the impact of higher input costs on each consumer stock under its coverage, assuming that input cost makes up an average of 30% to 40% of their cost of goods sold.

       It gathered that for every 10% increase in total input costs, the gross profit margin of consumer companies under its coverage would decline by 1% to 3.7% points ceteris paribus for the financial year 2022 (FY22) to FY24.

       It noted that discretionary consumer stocks would be less affected by higher input costs compared to consumer staple stocks, given their higher gross profit margin.

       “We project a FY22-FY24 gross profit margin of 7.2% to 67% for discretionary consumer stocks compared to 18% to 52% for consumer staple stocks based on current forecasts,” it said.

       Raw material prices, especially wheat, palm oil, corn, soybean and brent crude oil, spiked during the February-to-March 2022 period amid concerns over supply disruptions owing to the ongoing Russia-Ukraine conflict since Feb 24.

       Based on Bloomberg data, wheat prices increased the most among key raw materials with 56% gains year-to-date as at March 22.

       This is followed by palm oil, corn and soybean, which recorded price increases of 37%, 35% and 28% over the same periods, respectively.

       “Among consumer staple stocks, we believe that Nestle (M) Bhd, Fraser & Neave Holdings Bhd or F&N, Power Root Bhd and Kawan Food Bhd have the biggest exposure to rising commodity prices due to the nature of their business and products.

       “Nevertheless, we believe they have the pricing power as long-term demand for consumer staples goods – essentially daily necessities – is generally inelastic,” CGS-CIMB Research said.

       On the other hand, the research house reckoned that consumer discretionary companies had minimal exposure to the high commodity prices, as they mostly procure semi-finished or finished goods.

       “We believe consumer discretionary players could mitigate this impact on strong pricing power to pass on the higher costs to customers, greater economies of scale and better cost control.

       “All in, we prefer Berjaya Food Bhd (BFood), Bonia Corp Bhd and Innature Bhd given their superior gross margin profile against peers,” it added.

       CGS-CIMB Research has kept its “overweight” call on the consumer staples sector.

       “Overall, we conclude that consumer discretionary stocks have better standing than staples stocks in this operating environment. This ties in with our top picks in the sector, which are BFood, Bonia and QL Resources Bhd.

       “For QL, we expect an increase in contribution from marine product manufacturing and the FamilyMart Business from the lifting of lockdown measures to aid in mitigating the impact of high commodity prices on its margins.”