Nestle Malaysia seen continuing to experience margin compression

Nestle Malaysia seen continuing to experience margin compression

As of now, the research house is retaining its earnings projection for Nestlé (Malaysia) Bhd, having factored in the higher input costs when making the forecast. — Reuters pic

Monday, 01 Aug 2022 1:27 PM MYT

KUALA LUMPUR, Aug 1 — Nestlé (Malaysia) Bhd is expected to continue experiencing margin compression moving forward due to its inability to fully pass on higher input costs to consumers, analysts said.

However, the research house said it remains cautiously optimistic about the food and beverage company’s financial year 2022 (FY2022) earnings growth.

As of now, the research house is retaining its earnings projection for Nestlé, having factored in the higher input costs when making the forecast.

In a note today, the research house said it is also maintaining its “neutral” call on Nestlé with an unchanged target price of RM141.50.

During last Friday’s second quarter (Q2) FY2022 briefing, Nestlé indicated that multiple headwinds will persist in the second half of FY2022.

“The high prices of commodities and materials, currency fluctuations, supply disruptions, and the increase in the minimum wage will have a significant influence on production costs, which might lead to a decline in profit margins.

“The group hedged against the US dollar to lessen the effects of the weakening ringgit because the raw materials were bought in US dollars. The final effort to mitigate the impact of margin erosion, according to management, will be an increase in selling prices,’’ said MIDF Research.

Overall, it reckons that 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.

Hong Leong Investment Bank Bhd (HLIB) said Nestlé’s management has revealed that the price hike put in place has been moderate and the group would still have to absorb some of the cost pressures.

“Despite the initiatives on internal savings and the hedging policy, the prolonged volatility of commodity prices prompted Nestlé to further increase shelf prices across different segments of its products,’’ it added.

HLIB believes that the reduction in Covid-19-related expenses should help ease the pressure on its bottom line.

The investment bank also maintained a “hold” call on Nestlé with an unchanged target price of RM121.60.

Nestlé’s net profit increased to RM169.65 million in the second quarter from RM134.53 million in the same period last year on stronger sales and lower Covid-19-related expenses.

The improved performance was achieved despite the impact of increased commodity prices and unfavourable exchange rates, as well as the impact of the Cukai Makmur (prosperity tax) on profit after tax.

Its revenue jumped to RM1.64 billion from RM1.38 billion, driven by both domestic and export sales which increased by 12.5 per cent and 48.1 per cent respectively. — Bernama