Kenanga Investment Bank Research is maintaining a cautious outlook on Nestle’s prospects, anticipating downside risks to its top line growth and margins with consumers possibly going for cheaper brands and alternatives.
PETALING JAYA: Despite having recorded a positive performance in 2022, analysts remained concerned over the near-term impact of operating expenses and the down-trading of consumers on food processing giant Nestle (M) Bhd
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The company has experienced a strong financial year 2022 (FY22), charting a mid-teen year-on-year (y-o-y) increase in revenue to RM6.7bil, which led to a y-o-y net earnings growth of 9% to RM620.3mil, allowing it to declare a total dividend of RM2.42 per share for the year.
Kenanga Investment Bank Research is maintaining a cautious outlook on Nestle’s prospects, anticipating downside risks to its top line growth and margins with consumers possibly going for cheaper brands and alternatives.
The research firm’s analyst Ahmad Ramzani Ramli, in a note published yesterday, said further increases in the average selling prices of Nestle’s products would serve to further dampen demand.
He said the gradual price hikes by Nestle could eventually come to an end by the second quarter of 2023.
He said its currency hedging strategy can shield it from any strengthening of the greenback as well as the whittling down of high-cost inventories and the expected easing of global supply-chain disruptions.
Ahmad Ramzani believes Nestle has a moral and environmental, social and governance obligations not to excessively raise the prices of its staple food products.
Kenanga Research has revised its earnings forecast for Nestle upwards by 4%, projecting the company to achieve RM721mil in net profit for FY23 on improved operating efficiency.
It has also adjusted its target price for the counter to RM122.07 a share from RM115.65, but is reiterating an “underperform” call on the stock.
TA Securities, meanwhile, anticipates a y-o-y moderation in revenue growth for Nestle in 2023, due to inflationary pressures and elevated borrowing costs impacting consumer spending on the back of the increasing interest-rate environment.
It said the headwinds should be cushioned by Nestle’s strong branding and the consumer staple nature of its products.
“While a sugar excise for premix beverage of 47 sen per 100g has been implemented effective Jan 1 this year on household brand Milo and some Nescafe premix coffee with sugar content of 33.3 g per 100 g, we see raw material costs for this year to be lower y-o-y, supported by moderation in commodity prices and weakening of the US dollar, hence leading to improvement in gross margin,” said TA Securities analyst Ong Tze Hern in his note on the fast-moving consumer goods concern.
He forecasts Nestle to see earnings growth of 4.8% y-o-y in 2023, mainly driven by an improvement in gross margin and the absence of the prosperity tax.
Ong posted a dividend-discount model-driven target price of RM130.30 a share on Nestle, accompanied by a “sell” call on the stock.
Separately, Hong Leong Investment Bank Research said Nestle’s net profit for 2022 has marginally outperformed consensus’ estimate, even after adjusting for a foreign exchange loss of RM40mil.
Its analyst Syifaa’ Mahsuri Ismail, who has a “hold” call on the counter, said while Nestle’s valuation is expensive with a price-earnings ratio (PE) of 47.9 times in comparison to its Swiss holding company Nestle S.A. who has a PE of 21.6 times, its risk-reward profile is fair, underpinned by its status as a key consumer staple food producer.
