Equity Analysis /

FM and EM Consumers: Unshackled and heading upwards

    Nirgunan Tiruchelvam
    Nirgunan Tiruchelvam

    Head of Consumers Equity Research

    Tellimer Research
    10 May 2019
    Published by
    • Consumer companies, unshackled from the twin risks of excessive debt and depreciation, could outperform in H2.
    • In 2018, the ‘danger zone’ 10 consumer stocks in our overall basket of 42 consumer stocks underperformed the S&P 500, MSCI EM and MSCI FM by 14-21%, showing that the risks are in the price.
    • Elections in Indonesia, Thailand and Nigeria have seen stimulus packages. Elections could boost consumer spending in the remainder of 2019.
    • Our top picks are THBEV SPCPF TBNESTLE NL and NB NL, but we also like INDF IJ and CPIN IJ (both Not Rated).

    Developing market consumer companies could be on the cusp of a sustained rally due to elections. Three of the largest markets have seen elections – Indonesia, Thailand and Nigeria. Sri Lanka’s presidential polls are also due within a year. Elections are typically a boost for consumer spending, as campaigns often involve consumer handouts and stimulus packages ahead of the polls.

    Our basket of 42 consumer companies has underperformed the S&P 500, MSCI EM and MSCI FM by 14-21%. This suggest the risks of high debt and depreciation have been absorbed. In Indonesia, Thailand and Nigeria, elections have seen a boom in consumer spending. In several cases, this has translated into stronger sales of key consumer items such as liquor, basic food and snacks.

    The ‘danger zone’ of our consumer stock coverage has underperformed YTD 2019, suggesting the downside risks of debt and depreciation are factored in. Our basket of consumer stocks has outperformed the major indices. Our Teflon Test stress tests the strength of the companies’ balance sheets using six key metrics. We find that more branded consumer companies are more immune to the risks. In contrast, the food processors and retailers (such as WIL SP, FLOURMIL NL and CPALL TB) are among our 10 danger zone companies.

    Our favoured recommendations are branded and at close to the bottom of the valuation cycle. These include THBEV SP, CPF TB, NESTLE NL and NB NL, but we also like INDF IJ and CPIN IJ (Not Rated). Branded consumer plays tend to be more resilient to the risk of debt and depreciation, due to their steady cash generation. THBEV SP and CPF TB have net gearing levels of over 1x, but they are deleveraging and converting their debt into Thai baht.