Nestle (Malaysia) Bhd (Nestle) needs to ramp up marketing activities to sustain sales momentum which could squeeze operating margins in the sequential quarters.
In its research note today (Oct 30), Maybank Investment Bank Berhad (Maybank IB) said the demand for staple goods, however, will continue to be stable amid cautious consumer spending.
“For the remainder of FY23, we expect Nestle to double down on its marketing efforts, leveraging on higher retail footfall during the year-end festivities and school holidays to drive brand awareness and volume growth.
“Separately, the group will not be affected by the recent increase in sugar tax announced in Budget 2024 as all its products have been reformulated below the sugar tax threshold,” it added.
The research house maintains it SELL call and DCF-TP of RM119.00 (WACC: 6.3%, LT growth: 2.5%).
It noted that the risks to its calls are a spike in raw material prices and sharp appreciation of USD against ringgit will also affect its earnings, for about 50% of its raw material requirements are denominated in USD.
“Nestle’s export sales, which account for about 20% of total sales, should however provide some natural hedge,” it added.
Maybank IB said at Nestle 3Q23 results briefing, management shared that strong domestic sales (+12% YoY) were attributed to both positive price adjustments (price hike) and resilient volume growth.
“New products launched in 3Q23, for example, ‘Nestle Goodness’ dairy-free products and Kit Kat Salted Caramel Cookies also aided
demand.
“For 9M23, export sales have fallen -8% YoY coming from a high base in 2022. Nestle believes this to be a temporary blip and expects further opportunities for export growth going forward,” it said.
The research house noted that 9M23 export sales accounted for c.18.7% of group sales vs. a historical average of c.20%,” it said.
Meanwhile, Maybank IB noted that while domestic product demand remains healthy with sales growth in both its in-home and out-of-home sales channels, but there are signs of consumer spending shifting towards Nestle’s lower-priced mainstream brands.
“Conscious of this, the group has decided to pullback certain planned price hikes (for coffee products) to a later date even though higher group cost of production has not been fully passed on to consumers,” it added.
