Retail Price Index data for the month of April show that the prices of retailed goods were generally stable as year-on-year (YoY) growth was relatively unchanged, while the month-on-month (MoM) moves were likewise calm. Upon further dissecting the data, we note that the two major categories of Food and Beverages & Tobacco saw price momentum slowing down versus year-ago index levels, although MoM trends were a bit more volatile with Food showing a steady rise in prices in the high 0.20% range, while Beverages & Tobacco alternated between months of slower and
higher increases. <\/p>\n\n\n\n
Based on these historical data alone, we view these price moves as generally positive since more stable prices are a sign that cost and margin pressures are easing, hence the slower pass-through to consumers. Not to mention, this could also facilitate better demand and volume-driven sales. However, moving forward the coming months will likely bring about a whirlwind of factors that will influence the current price trajectory that we are seeing. <\/p>\n\n\n\n
On one hand, base effect advantages would be on the positive corner as we move forward, something which would likely be felt in YoY price growth, but on the other side of the spectrum, the surging USDPHP is likely to jack up the costs of imported goods for the month of May and potentially in future months as well if left unchecked.<\/p>\n\n\n\n
Another risk at play would be potential damage to crops as we enter typhoon season, something which could bring about another leg up to the prices of Food-related products.<\/p>\n\n\n\n
The 1st quarter (Q1) 2024 earnings were a showcase of improving margins and volumes for many of our listed food manufacturers. But with the aforementioned risks looming in the horizon, we note that there is a danger that this positive momentum could be derailed in Q2. We touched upon this in a previous note, but it should be said that many of our food manufacturers have heavy exposures to the USD via the importation of raw materials. <\/p>\n\n\n\n
As such, while we were previously banking on the possibility that our listed manufacturers (such as URC) would finally be able to bring operating margins back to higher pre-pandemic levels, this might no longer be the case. As such, for now we are recalibrating our strategy to focus on consumer names that (1.) can pass on cost \/ price pressures, and\/or (2.) have diversified businesses with international exposures.<\/p>\n\n\n\n
Our picks are therefore DNL and JFC. <\/p>\n\n\n\n
DNL, being able to fully pass on costs, derives 32% of its sales from exports. JFC, meanwhile, sees 29.1% of total EBITDA coming from its international segments, while North America alone generates 8.7% contribution. Dollar revenues from these segments can therefore help to offset the importation costs that the PH segment will incur. <\/p>\n\n\n\n
As for URC, which was previously one of our top picks, we still think that the stock is a solid long-term prospect and could still be a cautious buy, but currently we are ascribing a formal HOLD rating on it given the pervading forex risks.<\/p>\n\n\n\n