Wednesday May 14, 2008

Food and beverage companies cautious about earnings outlook

By LEONG HUNG YEE

PETALING JAYA: Rising inflationary pressure and volatile financial markets have prompted some companies to forecast conservative earnings as they brace for a potential slowdown in consumer spending this year.

Companies cautious about their earnings outlook are mainly those in the food and beverage industry and they include Nestle (M) Bhd, Dutch Lady Milk Industries Bhd and Fraser & Neave Holdings Bhd (F&N).

Most of them import their raw materials, including milk and wheat, where the prices have surged in recent months.

While contending with margin squeeze, the companies would not want to pass on most of the costs yet on concerns the higher prices would affect consumer spending, an analyst said.

“The outlook for consumer spending might not be as bright but the domestic economy is still strong.

“We expect consumer spending to remain at current levels but the Government will have to deal with issues like inflation to improve consumer sentiment,” said the analyst with local research house.

Meanwhile, CLSA Securities expects consumer spending to remain high.

It said high commodity prices would boost the country’s gross domestic product growth and consumer spending would stay resilient, given rising household income for farmers, civil servants and private sector employees.

“The Government can still afford to subsidise essential food items and petrol,” it added.

Goldman Sachs Group Inc forecasts crude oil may rise to between US$150 and US$200 a barrel within two years as growth in supply fails to keep pace with increased demand from developing nations.

Nestle had earlier warned that its earnings were expected to soften this year on rising raw material prices, with its managing director Sullivan O’Carroll cautioning high commodity prices remained a concern.

“The ongoing upsurge in the prices of major raw materials continues to put high pressure on the group’s ability to maintain gross profit margins,” he said.

Investors, however, continue to buy into the counter on Nestle’s strong dividend payout.

Aseambankers Research said in its report Nestle offered decent prospective dividend yields of 5% to 5.5% in 2008 to 2010 for defensive-minded, long-term investors.

Dutch Lady had also voiced concern over escalating raw material costs at the release of its third-quarter results last November.

KFC Holdings (M) Bhd expects to see store sales growth holding up at 4% to 5% year-on-year in 2008.

F&N is stepping up its promotional activities to boost sales in anticipation of waning consumer spending.

Although F&N projected a slower second half, it expects revenue to easily exceed the RM3bil mark for the current financial year ending Sept 30.

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