KUALA LUMPUR (Oct 27): Although Nestle (Malaysia) Bhd’s results for the third quarter ended Sept 30, 2023 (3QFY2023) met analysts’ expectations, the company’s outlook — amid higher input costs and food inflation — appears to be a cause for concern.
The food and beverage (F&B) manufacturer’s latest earnings also saw most analysts covering the stock maintaining their ratings on Nestle. There were six “hold” calls, two “buy” calls, two “neutral” calls, one “sell” call and one “underperform”, with an average target price (TP) of RM131.94, Bloomberg data showed on Friday.
AmInvestment Bank Bhd, who has a “hold” call on Nestle, said that it continues to identify food inflation as Nestle’s biggest obstacle in the near-to-medium term and expects commodity prices to continue to be elevated.
“Major commodity prices remain above pre-pandemic levels, even though food commodity prices have softened slightly. Cocoa and sugar prices are still trending upwards which could cause margin compression on certain products,” it said in a note.
AmInvestment has cut its earnings forecast for Nestle for FY2023 up to FY2025 to factor in higher operating expenditure (opex) and pressure on input cost from ongoing volatility in commodity prices as well as currency weakness.
However, the research house is positive on Nestle’s commitment to innovation, coupled with the pipeline of new products that are expected to sustain revenue growth and attract customers.
“In 3QFY2023, Nestle introduced new flavours for ice cream, dairy free drinks and new food items, all of which were well-received by customers with a positive response,” it noted.
Kenanga Investment Bank Bhd, which has an “underperform” rating on Nestle, said that it has adjusted its net profit forecast lower for Nestle for FY2023, but was maintaining its FY2024 forecast.
“We remain cautious on the company’s outlook. The absence of a significant recovery in margins 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 downgrade by switching to cheaper alternatives, amidst sustained high inflation," it said.
The research house opined that certain Nestle products, like cereal, milk and evaporated milk could be more vulnerable than the others given its low brand equity.
"Nonetheless, we take comfort in Nestle’s wide range and variety of staple food products, which could cushion the impact of downtrading by customers, if it happens," it added.
Meanwhile, TA Securities Holdings Bhd, who is among two research houses with a “buy” call on Nestle — besides UOB Kay Hian — is anticipating that Nestle will see continued robust domestic demand, despite the government’s plans to impose higher excise duties on sugary drinks beginning next year, which will pose a threat to Nestle’s net margin.
TA Securities expects the costs of key raw materials like sugar and cocoa will remain elevated for the next three months due to supply shortages resulting from delayed shipments in Brazil.
"Despite these challenges, we believe Nestle will implement reasonable price adjustments to its product offerings to offset the margin-squeezing impact. This should not significantly impact sales volume, given the price-inelastic nature of its products. That said, we expect the export sales will be buoyed by the favourable forex translation against the backdrop of weakened ringgit," it said.
At noon break, Nestle shares were trading 10 sen or 0.08% lower at RM124.80, valuing the company at RM29.27 billion.