Nestlé (Malaysia) Bhd will not raise prices over the immediate term thanks to softening commodity prices. Meanwhile, it is confident that its top line momentum will sustain into 2HFY23 as consumer spending appears to be stable while new products aimed at local taste buds are also likely to boost sales.
Kenanga Investment Bank walked away from NESTLE’s results briefing feeling mixed on its prospects. The key takeaways are as follows:
1. NESTLE will not raise prices over the immediate term thanks to softening commodity prices. It guided for its margins to stabilise if not improve slightly in 2HFY23. Nonetheless, it will continue to keep a watchful eye on commodity prices on elevated geopolitical tensions and the potential onslaught of a strong El Nino.
2. NESTLE reiterated its view that that domestic consumption will remain robust on the back of steady fundamentals and continued government initiatives. The demand for both home and out-of-home consumption appears to be healthy. Meanwhile, there is weakness in export sales due to high inflation.
However, export sales should improve in 2024 assuming inflation is to gradually ease coupled with the introduction of various new products.
3. NESTLE will continue to aggressively roll out new products until 3QFY23. The recently-launched new products include Nescafe Coffee Kedah (with local coffee beans), Nestle Kit Kat Pink Ice Cream (tangy strawberry with strawberry cheesecake flavour coating), Nestle Kit Kat Wafer (with ketupat-stamped packaging), Maggi Mi Goreng Warisan Laksa (with bunga kantan taste) and Maggi Pedas Giler Cheezy Berapi (with cheese).
These new products have been well-received by the market as they appeal to local taste buds. Made of local ingredients, they also command better margins. On a less encouraging note, its plant-based products have been slow in gaining traction.
4. NESTLE has entered into a strategic partnership with the government to promote modern agriculture. The key objectives of this partnership include:
(i) to address food security by developing modern agricultural facilities and accelerating local farming, and
(ii) promoting farming as a choice of profession for youths. Additionally, this project will also support NESTLE in cultivating local products and accelerating its innovation.
5. NESTLE reiterates that its ESG initiatives remain on track. For instance, it planted its millionth tree under Project ReLeaf in June 2023. Moving forward, an additional 1m trees are targeted to be planted by June 2024, whilst the balance 1m are expected in 2025.
Forecasts.
Kenanga Investment Bank maintain their forecasts which have adequately reflected the above-mentioned trends. The bank also maintains their DCF-derived TP of RM121.18 (based on WACC of 4.9% and TG of 2%). There is no adjustment to their TP based on ESG given a 3-star rating as appraised by us with a UNDERPERFORM call.
