Consumer Sentiment Holding On But Not For Long

RHB Investment Bank Bhd (RHB Research) has maintained a NEUTRAL call on the consumer products sector, while reaffirming BUY ratings on selected consumer counters. The analyst believes the sector continues to offer a defensive positioning amid global macroeconomic uncertainties, thanks to resilient domestic demand supported by stable employment and ongoing fiscal measures.

Despite this resilience, the house noted that consumer sentiment could face further pressure from persistent inflation and economic uncertainty driven by global trade tensions. Following a strong performance in the first quarter of 2025, which benefited from an earlier Aidilfitri season, retail players may see a moderation in growth numbers for the second quarter. Consumers are expected to remain cautious, focusing more on essential goods and value-based purchases while limiting discretionary spending.

The house cautioned that retailers are bracing for more operational headwinds, with a combination of rising operating expenses such as the expanded sales and service tax (SST), higher electricity tariffs and increased EPF contributions for foreign workers. RHB Research doubted that retailers like AEON, Padini, Mynews and Focus Point would be able to fully pass these added costs on to consumers, given the elasticity of demand and the enforcement of anti-profiteering regulations. This, they said, could weigh on margins unless companies achieve meaningful operational efficiencies.

In contrast, food manufacturers such as Nestlé, Farm Fresh and Power Root are expected to fare better. The analysts pointed to easing commodity prices and a strengthening ringgit as catalysts for improved margin outlooks for these producers in the coming quarters.

Among its top picks, RHB Research reiterated preference for large-cap retailers with strong brand equity and dominant market positions. MRDIY and 99SMART were highlighted for their ability to absorb cost inflation due to their scale and operational efficiency. Farm Fresh was commended for its bold expansion into new dairy segments, while Guan Chong's forward sales and normalised production are seen to underpin a solid earnings trajectory. Focus Point, despite margin pressures, was also named as a top pick due to strong optical sales momentum driven by rising rates of myopia and proactive marketing efforts.

RHB Research noted that downside risks to its view include a sharper-than-expected economic slowdown or a renewed spike in commodity prices, which could further disrupt cost structures and consumer sentiment.