PETALING JAYA: Nestle (Malaysia) Bhd’s commitment to remove the usage of non-recyclable/reusable packaging by 2025 is seen as a step in the right direction.
It addresses the pressing need to reduce the amount of single-use materials consumed by society.
As for now, two-thirds of Nestle’s products are designed to be recycled, while 98% of plastics that are difficult to recycle have been removed from its production process, Maybank IB Research said.
Its move also sets an example for its peers to emulate.
However, this could prove to be a costly exercise, given the higher demand for recycled flakes which may drive costs above virgin plastic materials, the report said.
To fully convert to recyclable packaging would mean more research needs to be done in order to address the root of the global plastic wastage problem.
This is so since about 10% of recyclable goods are actually recycled and the remaining 90% get accumulated in landfills or littered in the natural environment, the report said.
It said there was growing pressure from end-consumers for the food and beverage (F&B) industry to adopt sustainable sourcing solutions.
“Nestle is a leader in this aspect with a clear framework in place to promote raw material traceability and sustainable farming practices, while being socially responsible in uplifting the livelihood of farmers that they work with, ’’ Maybank IB said.
Nestle on-boards local farmers into its rural development programmes, aiming to provide knowledge, resources and training to ensure their contract farmers adhere to sustainable agricultural and environmental farming practices.
So far, there are three programmes running for its chilli, rice and coffee farmers in Malaysia.
For cocoa, it uses 100% sustainably sourced cocoa from a similar programme run in Cote d’Ivoire and Ghana, it said.
Relatively steady demand for Nestle’s staple F&B products holds it in good stead to weather through near-term disruptions in new product launches and absent product marketing campaigns due to Covid-19 pandemic related lockdowns, Maybank IB said.
“That said, at 49 times financial year 2021 (FY21) price earnings ratio (PER), Nestle is currently trading at rich valuations, almost double our average consumer sector FY21 PER mean of 25 times.
“Our earnings estimates and discounted cash flow-based target price of RM100.30 (assuming the 6.3% weighted average cost of capital and 2.5% long-term growth) are unchanged, ’’ Maybank IB said.
The research house also added that there were several risk factors for its earnings estimates, price target, and rating for Nestle.
“A spike in raw material prices may impact earnings for Nestle.
“Additionally, a sharp appreciation of the US dollar against the Malaysian ringgit will also affect its earnings, for about 50% of its raw material requirements are denominated in the US dollar.
“Its export sales, which account for about 20% of total sales, should however provide some natural hedge, ’’ Maybank IB added.