KUALA LUMPUR (July 26): Shares in Nestlé (Malaysia) Bhd (KL:NESTLE) fell to their lowest in more than three months, after the locally listed unit of the Swiss food-and-beverage conglomerate reported weaker-than-expected quarterly results.
Nestlé declined as much as RM3.10 or 2.5% to RM118.90 on Friday, its lowest since April 4. The stock was trading at RM119 at 9.15am, giving the company a market capitalisation of nearly RM28 billion on Bursa Malaysia. At least two research houses cut their recommendation for the stock to “sell”.
The latest results missed expectations, with the first-half net profit of RM289 million accounting for only 37% of the consensus’ full-year forecast, prompting analysts to trim their earnings forecasts.
“We reckon [that] Nestlé will continue to face challenges with uncertainty from volatility in commodity [prices], coupled with weakening currency,” said Hong Leong Investment Bank (HLIB). “Sales will take time to normalise, considering the still intense Israel-Gaza conflict that is unfortunately seeing no signs of abating.”
The house downgraded the stock to “sell” and flagged the “relatively high valuation” at nearly 48 times forward earnings. That compares to its ultimate holding company in Switzerland that trades at close to 18 times, which “now seems harder to justify, in view of its earnings decline,” HLIB said.
Shares of Nestlé have declined more than 8% from this year’s peak in May. The company, which mostly sells food and beverage staples, has fared relatively better than its peers in the consumer sector that sells non-essential products.
Nestlé, along with other consumer brands such as Starbucks and McDonalds, have been facing intense boycotts in Malaysia due to their purported support or perceived link to Israel amid the ongoing conflict in Gaza.
A large majority of nine out of 13 research houses have the stock on a “hold” call, while three have Nestlé on “sell” ratings, and only one recommends “buy”. The consensus 12-month target price is RM120.87, according to Bloomberg.
Nestlé is expected to make a net profit of RM777 million for the whole of 2024, according to consensus estimate following the latest cuts.
Nestlé SA, the parent company, has cut its full-year sales growth target to 3% from 4%, while slowing price hikes. “We expect Nestlé Malaysia to follow suit,” said Kenanga Investment Bank (Kenanga IB), which has the stock on an “underperform” call.
Nestlé Malaysia had earlier raised prices for at least 20 products to protect margin on higher commodity prices.
While Nestlé has a strong brand and diversified product range with inelastic demand, “recent experience has shown that it is vulnerable to downtrading by consumers, amid sustained elevated inflation,” Kenanga IB warned.