PETALING JAYA: Analysts are generally mixed on Nestle (M) Bhd
due to issues such as volatile commodity prices, while optimism hinges on resilient domestic demand and new product lines.
Nestle experienced a deceleration in its year-on-year (y-o-y) sales growth of 7.8% for the first half of 2023, compared to a higher growth of 17.8% for the same period last year.
This was due to the high base effect and retaliatory consumption observed in 2022 following the post-lockdown reopening.
Of note, domestic sales saw a commendable increase of 10.8% amounting to RM2.9bil, driven by robust demand for staple foods.
This was, however, tempered by a 3.2% decline in export sales, owing to higher inflationary pressure.
Nevertheless, TA Research believes that the decline in export sales is likely to be a temporary effect, which would gradually return to the pre-lockdown level of approximately RM1.1bil annually.
Despite a slight compression in gross profit margin to 31.4% for the first half of 2023, against the 32.8% recorded in the same period last year, TA Research anticipates that these cost fluctuations are still manageable for Nestle.
“Hence, no immediate price adjustments are anticipated, as the cost of raw materials is on the verge of stabilising or potentially easing to lower levels amid the group’s efforts to optimise cost efficiency,” it said.
The research house also gathered that Nestle’s acquisition of Wyeth Nutrition (M) Sdn Bhd (WNM) would present the group with an opportunity to diversify its product offerings and expand its market share in the nutrition sector, especially in the infant nutrition product segment.
Having said that, TA Research said that the financial contribution from WNM is likely to be insignificant due to its smaller market size in comparison to Nestle’s substantial market size of RM31bil.
However, the research house expects Nestle to incorporate the financial results of WNM from the third quarter of the year onwards.
Meanwhile, Hong Leong Investment Bank (HLIB) Research opined that continual product innovation was an important driver for Nestle to continue defending its margins with the introduction of products that provided better taste and value for money, in line with market demand.
The research house commended Nestle for its steadfast approach in capturing demand by leveraging all opportunities to increase the reach of its core products, while continuing to lead in product innovation, which could prove useful as it cited Nestle itself acknowledging the operating environment remained challenging.
“Judging from the current landscape, Nestle does not discount the probability of further price hikes on the cards.
“We understand that the y-o-y results improvement has been largely contributed by the adjustment in prices with volume remaining stable,” it said.
Concurrently, Kenanga Research is reiterating its cautious stance on Nestle due to the difficulty it faces in passing on higher input cost to consumers.
This is evident from its recent experience which eroded margins, as well as a potential rebound in commodity prices due to China’s reopening and lingering supply chain disruptions on the back of geopolitical tensions, despite the recent stabilising.
“Sustained high inflation may also eventually drive consumers to downtrade and opt for cheaper brands or alternatives.
“In addition to concerns over the loss of market share, we believe Nestle has moral as well as environmental, social and governance obligations not to excessively raise prices of its staple food products that make up the population’s daily dietary intake,” said Kenanga Research.
Understandably, the research house is maintaining its “underperform” call on Nestle with a target price of RM121.18 per share, with HLIB Research posting a “hold” recommendation.
On the other hand, TA Research underlined its optimism for Nestle with a “buy” call on a target price of RM151.30.
