KUALA LUMPUR (Aug 1): The margin pressure that Nestlé (Malaysia) Bhd is facing due to higher commodity prices and foreign exchange (forex) volatility is expected to continue, said analysts.
Analysts who attended a briefing for the group's second quarter ended June 30, 2022 (2QFY22) last Friday (July 29) said they remained cautiously optimistic for the group's earnings growth for the financial year ending Dec 31, 2022 (FY22).
Due to the rise in global commodity prices and the weakening of the Malaysian ringgit against the US dollar, Nestlé's gross profit margin fell to 31.6% in 2QFY22, from 34.8% a year earlier, according to TA Securities Research.
“Despite softening of commodity prices recently due to recession fears, with the group’s hedging policy locking in prices for most of the raw materials for the year, [Nestlé's] management expects margin compression to alleviate earliest by 2QFY23 onwards,” it said in a note.
MIDF Research, meanwhile, expects Nestlé to continue experiencing margin compression moving forward due to its inability to fully pass on the higher input costs to consumers amid inelastic demand for its product.
“Nevertheless, Nestlé's long-term prospects are positive, supported by its strong balance sheet and high inventories, which could provide a cushion towards any downside risk,” it said.
Despite internal savings initiatives and its hedging policy, the prolonged volatility of commodity prices has prompted the group to hike shelf prices of its goods again.
"Nestlé said further selling price hikes are a last resort (we estimate that Nestlé has implemented a round of selling price hikes in 1H22 [the first half of 2022]), but it has to keep this option open. This is in order to ensure its margins remain healthy, given the surge in its operating costs and the current high levels of raw material prices,” said CGS-CIMB Research.
Consumer demand to stay healthy amid subdued operating market
For the second half of 2022 (2H22), Nestlé believes that demand for its products will remain healthy despite current inflationary pressures as most of its products are daily necessities, said CGS-CIMB.
“Meanwhile, it will continue to expand its product offerings by launching new product innovations. On top of that, Nestlé expects its export revenue to remain solid in 2H22, buoyed by strong demand from its export markets, albeit lower than the 13.7% year-on-year growth in 1H22,” it added.
CGS-CIMB maintained its "hold" call on Nestlé, with a target price (TP) of RM133.90, and no changes made to its earnings forecasts. “Nestlé’s current valuations have priced in its strong fundamentals and the defensive nature of its business, in our view.”
TA Securities kept its "add" call with a TP of RM134. It raised its FY22, FY23, and FY24 earnings forecasts by 29.1%, 20.3%, and 16.1% respectively after taking into account Nestlé’s sales growth will continue in FY22 due to robust recovery in out-of-home consumption, and lower operating expenses on reduced Covid-19 related spending.
MIDF also maintained its "neutral" call, with a TP of RM141.50.
“Post analyst briefing, we kept our earnings forecast as we had previously factored in the higher input costs when making our forecast. Our TP is based on DDM (dividend discount model)-based valuation with a sustainable growth rate of 2.5% and weighted average cost of capital (WACC) of 5.2%.
“Downside risks are: a significant depreciation of ringgit against the US dollar, and a further increase in commodity prices which posted upward pressure on the margin,” MIDF added.
Nestlé’s net profit in 2QFY22 grew 26.11% to RM169.65 million from RM134.53 million a year ago, on the back of increased sales. Quarterly revenue increased by 18.78% to RM1.64 billion as compared to RM1.38 billion driven by domestic and export sales.
For the six months ended June 30 (6MFY22), the food giant’s net profit rose 21.04% to RM374.83 million from RM309.69 million, while revenue was up 17.82% to RM3.33 billion from RM2.83 billion.
According to Bloomberg data, Nestlé has eight “hold” and six “sell” calls, with a 12-month TP of RM132.09.
There was no “buy” call so far for the stock.
At Monday’s noon break, Nestlé’s share price had dipped by 10 sen or 0.07% to RM134.60, giving it a market capitalisation of RM31.56 billion. It is currently trading at a historical price-to-earnings ratio of 49.71 times.