RAM upgrades retail sector outlook to stable after two years

PETALING JAYA: RAM Ratings has revised the negative outlook for the local retail sector after almost two years, as the sector is seen as a key beneficiary of the upbeat consumer sentiment after the 14th general election in May.
The rating agency revised the negative outlook, in place since October 2016, to stable following the betterment in consumer sentiments after the polls and the surge in the Malaysian Institute of Economic Research’s consumer sentiment index(CSI) to a high of 132.9 points in 2Q 2018, after languishing below 100 points for 15 consecutive quarters since 3Q 2014.
Following the implementation of the Goods and Services Tax (GST) on April 1, 2015, the CSI hit a trough of 63.8 in 4Q 2015.
RAM’s head of consumer and industrial ratings Kevin Lim said the zero-rating of the GST effective June 1 is expected 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 Sept 1.
This view is also shared by Retail Group Malaysia, which projected a stronger 5.3% rise in retail sales for 2018 from the earlier estimate of 4.7%.
However, Lim said, in some cases the move to zero-rate GST may broaden the operating margins of businesses that have been absorbing the tax.
“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,” he said.
“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, that is, less than half of the amount collected through the GST,” he added.
The government has also pledged initiatives aimed at increasing the purchasing power of consumers, particularly lower-income households earning less than RM3,500 a month.
In that light, RAM Ratings anticipates some upside in the sales and operating performances of retailers such as AEON Co (M) (AA2/Stable/P1), F&N Holdings (AA1/Stable/P1), Mydin Mohamed Holdings (issue rating: AAA(fg)/Stable) 2 and Poh Kong Holdings (issue ratings: AAA(fg)/Stable/P1).
Lim said the more favourable operating landscape is expected to provide some much-needed respite to these players, which have been affected by weak consumer sentiment in recent years.