Published on 27 Jul 2018.
RAM Ratings expects the retail sector to be among the prime beneficiaries of the country’s generally more upbeat consumer sentiment and the string of measures proposed by the new government to alleviate the rising cost of living. Accordingly, we have revised the negative outlook on the retail sector (in place since October 2016) to stable.
Consumer sentiment has improved markedly following the 14th General Election (GE14) in May 2018. Notably, the MIER consumer sentiment index (CSI) – a barometer of consumer confidence – surged to a high of 132.9 points in 2Q 2018. Prior to that, the index had been languishing below 100 points for 15 consecutive quarters since 3Q 2014. The CSI hit a trough of 63.8 in 4Q 2015, subsequent to the implementation of the GST on 1 April 2015. The latest RAM Business Confidence Index1 also suggests that firms are more upbeat on their business outlook for 3Q-4Q 2018 post-GE14, with both the Corporate and SME segments displaying higher overall indices after GE14 (at a respective 57.3 and 53.4) compared to before the event (at a respective 56.6 and 51.4).
“We expect the zero-rating of the GST effective 1 June to translate into stronger consumer spending and sales for retailers, especially during the three-month tax holiday until the Sales and Services Tax (SST) is reinstated on 1 September,” highlights Kevin Lim, RAM’s Head of Consumer and Industrial Ratings. This view is also shared by Retail Group Malaysia, which had projected a stronger 5.3% rise in retail sales for 2018 from the earlier estimate of 4.7%. In some cases, the move to zero-rate the GST may broaden the operating margins of businesses that have been absorbing GST since its implementation. Amid promotional campaigns, expansion of outlets and restraint in passing on higher costs to consumers, we can observe (from a sample of seven retailers) that average post-GST operating margins (for 3Q 2015–1Q 2016) had mostly narrowed y-o-y compared to the previous corresponding period.
“Consumer spending and retail sales are envisaged to normalise somewhat after the reinstatement of the SST. However, the overall tax burden on consumers will be considerably lighter, with the Government’s tax collection estimated to come in at RM21 billion per annum, i.e. less than half of the amount collected through the GST,” adds Lim. The Government has also pledged wide-ranging initiatives aimed at increasing the purchasing power of consumers, particularly lower-income households (i.e. the bottom 40% of all households, which earn less than RM3,500 per month). These measures include the re-introduction of a targeted fuel subsidy as well as a medical subsidy, reduced excise duty on first-car purchases, the gradual abolition of expressway tolls and a higher minimum wage. While details are scant and execution will take time, these moves are deemed positive for the retail sector.
In the same vein, we anticipate some upside in the sales and operating performances of RAM-rated retailers such as AEON Co (M) Berhad (AA2/Stable/P1), F&N Holdings Berhad (AA1/Stable/P1), Mydin Mohamed Holdings Berhad (issue rating: AAA(fg)/Stable)2 and Poh Kong Holdings Berhad (issue ratings: AAA(fg)/Stable/P1).3 “The more favourable operating landscape is expected to provide some much-needed respite to these players, which have been affected by persistently weak consumer sentiment in recent years,” observes Lim. That said, the retail industry is envisaged to remain highly competitive. Additionally, rapidly evolving consumer preferences and the rise of e-commerce are becoming more of a threat, especially for traditional brick-and-mortar retailers.
1 The RAM Business Confidence Index is based on data from a survey of close to 3,500 SMEs and Corporates. The index is designed to measure forward-looking expectations through the indication of positive and negative sentiment on key aspects that are pertinent to their business operations over the next 6 months. An index value of 50 is the neutral benchmark while a value above 50 indicates positive sentiment by the firm; a value of below 50 shows negative sentiment.
2 Issue rating of Mydin’s RM350 million Danajamin-guaranteed Islamic MTN Programme. Danajamin Nasional Berhad is rated AAA/Stable/P1.
3 Issue rating of Poh Kong’s RM150 million Danajamin-guaranteed Islamic CP/MTN Programme.
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