PETALING JAYA: While revenue for the quarter ended Sept 30 has expanded by 17% to RM1.68bil year-on-year (y-o-y) for Nestle (M) Bhd
, its net profit has declined by 23.9% to RM112.6mil, of which most analysts attributed to high input costs, rising commodity prices and a weak ringgit.
Research houses have advocated a cautious stance on the stock, believing that the present less-than-favourable operating environment to weigh on Nestle’s margins in the near-term.
CGS-CIMB Research, in its latest report, said the food and beverage (F&B) giant could increase the selling price of its products to pass on these rising costs to a certain degree, but it would be performed gradually, as the company is aware this would affect consumer demand.
On a positive note, despite the current inflationary pressures, analyst Walter Aw said the demand for Nestle’s products would remain healthy, as the company produces daily F&B necessities, and that it would expand its product offerings by launching more innovations.
Some new product launches over the said quarter include the Harvest Gourmet plant-based nuggets and other innovations such as Nestle Omega Plus dark chocolate milk powder, Maggi Nutri-licious noodles range and the introduction of premium chocolate block range Nestle Les Recettes De L’atelier.
“We reiterate our ‘hold’ call on the stock, as Nestle has strong fundamentals and an inelastic demand, with a target price (TP) of RM135,” said CGS-CIMB Research.
Other research houses broadly concurred that the company’s performance had marginally exceeded consensus estimates, but they also share the aforementioned cost concerns that may continue to hinder Nestle moving forward.
TA Research, its recent note, pointed out that the lifting of lockdown restrictions had contributed to 13.7% and 33.8% increases in Nestle’s domestic and export sales respectively for the first nine months of 2022 to RM5.02bil.
However, it added that while commodity prices had generally come off their highs from a few months ago, the ringgit has weakened by some 7% since June, and therefore Nestle would continue to face margin compression heading into the fourth quarter of 2022.TA Research said: “As disclosed in the last result briefing, the Nestle management considers a price hike as the last resort to mitigate the impact of elevated costs.
“We believe the group has no choice but to continue with price adjustments, but due to its strong branding and significant market share, we feel that the group’s products should be relatively price-inelastic.”
The research house maintained its “sell” call on the stock, with a TP of RM134, based on an unchanged dividend discount valuation.Kenanga Research maintained its “underperform” call on Nestle, which it defined as generating a total return of less than 5%, as it keeps its guarded outlook on the stock.
Not fully concurring with the demand inelasticity of Nestle products, it said: “We are cautious on Nestle’s outlook, and see downside risks to its topline growth and margins as consumers may opt for cheaper brands or alternatives, while cost pressures remain with extended supply chain disruptions as well as a seemingly prolonged Russian-Ukraine war.”
It said commodities prices have eased in recent weeks which should alleviate margin pressures for Nestle in the 2023 financial year, but unlikely to retrace to their pre-Covid levels. It added dairy prices are expected to sustain its uptrend into 2023 as supply is only expected to catch up with demand by the end of 2023. It has a TP of RM115.65 for Nestle.
