Logo of Nestle is seen in Konolfingen
PETALING JAYA: Analysts have mixed views about Nestle (M) Bhd
’s prospects amid rising input costs, higher commodity prices and increasing excise duty rate on sugary drinks under Budget 2024.
TA Research is cautiously optimistic on Nestle’s outlook for financial year 2024 (FY24), as it expects the fast moving consumer goods company’s earnings growth to be supported by robust domestic consumption.
“However, there is cautious outlook for export sales, primarily due to the robust exports in FY22 and FY23, which created a high base effect.
“Reverting to pre-pandemic export levels may require an extended timeline, and as such, a slower recovery trajectory is anticipated,” TA Research said in its latest report yesterday.
Post-Nestle’s recent results briefing, the brokerage firm said it came away with key takeaways, namely, there would be no price adjustment to be made despite elevated input costs and higher sugary drink taxes.
The effective tax rate in FY23 would remain elevated due to non-tax deductible items and cautiously optimistic outlook for FY24.
TA Research said Nestle’s management has affirmed its decision to refrain from immediate price adjustments, reflecting a steadfast commitment to its current pricing strategies and a belief in its ability to manage potential margin squeeze factors.
“Furthermore, the company has strategically positioned itself to withstand the impact of higher sugary drink excise duties by ensuring that most of its products contain less than 5g of sugar per 100ml serving, thereby minimising the effect of the tax increase,” it pointed out.
Meanwhile, although there was no recurrence of the prosperity tax, Nestle continues to grapple with an elevated effective tax rate, which remains above 30%.
“This persistent high tax rate can be attributed to non-deductible tax items that were incurred during the third quarter of FY23,” said TA Research.
Despite these challenges, the company is actively pursuing strategies to reduce its effective tax rate to below 30% by the end of FY23, added the brokerage firm.
TA Research has trimmed its FY24 to FY25 earnings forecasts for Nestle by 17.4% and 17%, respectively.
It downgraded the stock to a “sell” call with a lower target price (TP) of RM132.60 a share from RM151.30 previously.
Kenanga Research is also cautious on Nestle’s outlook given the absence of a significant recovery in margins, which suggests that it is still struggling to pass on higher input costs.
“Despite absorbing the higher input costs (by not significantly raising prices), there is still a risk that its customers may down trade, switching to cheaper alternatives amid sustained high inflation,” the research house noted.
However, Nestle’s wide variety of staple food products could cushion the impact of down trading by customers, said Kenanga Research.
The research house, which maintained an “outperform” call on the stock, has set a TP at RM115 per share.
The risks to its call include significant fall in commodities prices, a stronger ringgit resulting in lower cost of imported raw materials and consumers switching to food products of higher quality as purchasing power rises and inflation eases.
For Hong Leong Investment Bank (HLIB) Research, the key takeaways from Nestle’s briefing included the resilient domestic demand.
To recap, Nestle’s nine-month FY23 recorded top line growth of 7% year-on-year on the back of better domestic sales, despite the normalisation on the export front.
“Domestically, we understand this was thanks to solid growth in both the in-home and out-of-home segments,” HLIB Research said.
According to Nestle’s management, despite the price increase, the growth profile for Nestle products was in balance, as consumers down trade from its premium offerings to its mainstream.
Nestle also said that it would not be impacted by the increase in sugar tax in Budget 2024 as the “majority of its ready-to-drink beverages has been reformulated to be below the taxable threshold.”
Furthermore, continuous product innovation is an important driver for the group to continue defending its margin with the introduction of products that provide better taste and value for money, said HLIB Research.
The brokerage firm has kept its forecasts “unchanged”’ on Nestle, while reiterating a hold call with an unchanged share TP at RM122.50 a share.
“While valuation is expensive at 40.8 times FY23 price earnings in comparison to its holding coompany in Switzerland at 20 times, we opine Nestle’s current risk reward profile to be fair coupled with its status as a key consumer staple,” added HLIB Research.
