PETALING JAYA: At a time when companies are slashing spending and conserving cash, there are some choosing a different strategy – continue to spend and expand. One such company is NESTLE (M) BHD.
The food and beverage group has allocated the highest capital expenditure (capex) in six years of RM280mil this year.
It wants to add new manufacturing capabilities including expanding the production capacity for Maggi Noodles, as well as a new high-technology production line in Shah Alam.
Explaining the rationale behind this strategy, chief executive officer Juan Aranols told StarBiz the group is taking a long-term view for its business by consistently upgrading its manufacturing facilities to enhance capacity, productivity and efficiency, as well as keep up with technological advances.
“These projects were in our pipeline for the financial year ending Dec 31,2020, and we look forward to executing them.
“When we talk about sustainable performance, it is about delivering short-term results while putting the right capabilities in place to protect the future, ” Aranols said.
He noted that the group’s future projects are bolstered by its resources and contingencies.
“We are confident in our cash position. Being part of the larger Nestlé Group also provides us with the strong backing to support these long-term strategic choices, ” Aranols said.
Nestle’s cashflow has been steadily increasing in recent years from RM775mil in 2016 to RM850mil in 2019.
The group’s solid cashflow position reflects its ability to re-invest in its businesses and maintain its dividend payout ratio policy of 95% of net profit.
While the movement control order (MCO) has affected the company’s earnings in the first quarter, Nestle said it would keep to its dividend policy.
“We don’t foresee a change to this policy; we remain committed to providing shareholder value, ” he said.
Meanwhile, analysts have turned bearish on Nestle, with eight out of 13 analysts polled by Bloomberg having a “sell” call on the stock on concern of lower revenue and rising costs.
The consensus target price for Nestle Malaysia is RM122.50,11.4% below the stock’s current price of RM138.20.
Amid the global pandemic, CGS-CIMB Research expects the group to have weaker earnings in the coming quarters due to higher operating costs, rising prices of certain commodities and lower demand from out-of-home business channels, which would put pressure on its margins.
Nestle’s net profit fell by 20.8% to RM186.31mil in the first quarter from RM235.22mil in the corresponding quarter a year ago due to the MCO, which affected the group’s out-of-home channels as 78% of its customers including restaurants, coffee shops and dine-in outlets were closed.
Several brokerages have lowered their earnings forecasts for Nestle.
Maybank Investment Bank Research, for instance, cut its earnings forecasts for Nestle for 2020-2022 by 6%, 5% and 5%, respectively, on expectations of a weaker revenue environment.
AmBank Research said Nestle has incurred higher expenses from evacuation, full disinfection and complete sanitisation of the worksite amid the Covid-19 pandemic.
Aranols explained that the increased operational expenses was mainly due to expenditure for employees’ personal protective equipment, temporary allowances, additional safety protocol adaptations across all work sites and other arrangements to protect the workforce.
“As an example, when sea freighting of raw materials out of China became a challenge in January and February, we decided to airfreight key supplies to ensure our operational continuity, which meant some incremental costs, ” he said.
Given the higher uncertainties, Aranols foresees challenges related to the pandemic to persist in the coming months.
To overcome the gloomy environment, he said Nestle would tap into new growth opportunities this year via e-commerce acceleration from the increased demand for home delivery products.
“We continue to expand the range of Nestlé products available for consumers shopping online. There will also be a strong pipeline of new products coming in the second part of the year, ” Aranols added.
Although it is tough to foresee the full effects of the pandemic, he believed the group is moving towards a “progressive normalisation” when the Covid-19 pandemic is curbed.
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