Margin compression to persist in F&B sector

KUALA LUMPUR: MIDF Research expects margin compression in the food and beverage (F&B) sector to persist and continue for at least two consecutive quarters.

The research house said due to the normalisation of commodities prices, F&B players face challenges in controlling raw material costs in the short term on top of weakening ringgit.

“We expect that the margin compression will continue for at least two consecutive quarters. Nevertheless, we are not overly concerned on the commodity prices uptrend on the long term as we believe that local F&B players have taken appropriate measures through product innovation and improvement of internal operating efficiency.

“Hence, we are maintaining our ‘neutral’ call on the sector as we believe that measures taken by F&B players are appropriate to combat the rising costs,” MIDF said in a report Wednesday.

MIDF said in the latest earnings announcements, the F&B players under its coverage i.e. Fraser and Neave Holdings Bhd (F&N) and Nestle (M) Bhd have registered mixed earnings results.

“F&N (neutral, target price: RM25.32) latest earnings result came lower than ours and consensus expectation as earnings had been dragged down by Malaysian F&B business segment due to lower revenue and high operating cost. Hence, we revised our target price downward to reflect the slowdown of F&B Malaysia business segment as well as rising commodity prices.

With regards to Nestle (neutral, target price: RM82.82), latest earnings is in line with ours and consensus expectation. Therefore, we maintained our earnings forecast for Nestle as we believe it is fairly valued at this juncture,” it said.

It said Dutch Lady, which was not under its coverage, has recorded earnings below consensus expectation as uptrend in skim milk powder prices has impacted earnings.

MIDF said prices of commodities starting to normalise to FY14 level. It said after more than a year of declining trend from the beginning of FY15, the price of agricultural commodities such as skim milk powder, coffee beans and raw sugar has surged since February this year, at prices even higher than FY14 price levels.

Nevertheless, the price of cocoa has been dropping due to an increase in supply. In addition, the sector is further facing cost pressured by the depreciating ringgit as these commodities are traded in US dollar.

The research house said price of skim milk was expected that the upward trend would remain as demand continues to be strong while production of milk was falling in the major exporting regions, particularly Europe and Australia, coupled with an unprecedented decline in New Zealand milk supply due to wetter spring (Sep-Dec 16) season there.

The price of Robusta beans has appreciated to a US$2,100 per tonne level in November 16, up 36% from US$1,528 per tonne beginning of FY16. Meanwhile, the more premium Arabica coffee experienced a rise of 28% year-to-date on November 16 but has been on a decline ever since as the supply outlook for Arabica has improved.

“As the price spread between the two types of beans narrowing, some might regard the more premium Arabica beans as substitute to the scarce Robusta beans which might spur a rally on the price of the former. Currently, the price spread between Arabica and Robusta beans has dropped to US$597 per tonne from the average at US$1,000 level in the past two years.

“Going forward, we expect that coffee beans prices will remain volatile in the short and medium term,” MIDF said, adding that F&B players have strategies in placed to mitigate the rising commodity prices.