Rising cost pressures seen to weigh down consumer firms' profitability this year

But M&A activity to pick up the slack.

According to Maybank Kim Eng, cost pressures could drag down profitability, making earnings susceptible to disappointment.

M&A activity is the sector’s biggest wild card. Maybank notes that acquisition interest is still strong among consumer companies with ASEAN exposure, particularly those with good distribution networks.

Here's more:

Based on the parameters for recent transactions, such activities would likely keep sector valuations at elevated levels. We favour companies with a looser shareholding structure to play this theme, eg, Super Group.

Our top pick in the sector is OSIM International, whose brand is ranked No. 1 in all its key markets. An enviable brand equity position aside, the company also commands significant pricing power. We expect TWG to become a more significant earnings contributor (5% of 9M13 net profit) in 2014, bolstering future growth.

Our TP of SGD2.78 is based on 18x FY14E P/E and we expect the stock to re-rate on stronger earnings profile (16% EPS CAGR over FY14E-15E). Key risk to our call is a sharp slowdown in consumer spending in China, which makes up about 30% of the group’s massage product sales.

We prefer companies with regional growth stories, as Singapore is a mature and saturated market. A strong presence in the region will put the company in a better position to take advantage of the prevailing consumption trends.

In Singapore, weak retail sentiment will continue to weigh on consumption, not to mention a strong Singapore dollar which makes goods and services more expensive than in neighbouring markets. As evidence, the Retail Sales Index has been on a decline since 4Q12 and is currently at its weakest since the 2008-2009 Global Financial Crisis.

In Singapore, weak retail sentiment will continue to weigh on consumption, not to mention a strong Singapore dollar which makes goods and services more expensive than in neighbouring markets.

As evidence, the Retail Sales Index has been on a decline since 4Q12 and is currently at its weakest since the 2008-2009 Global Financial Crisis.

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