NESTLE has no immediate plan to raise product prices despite the volatile soft commodity prices. Key raw materials like sugar and cocoa have experienced price increases, while the cost of corn and soybean has declined. It hopes to offset the higher input cost with a higher sales volume. We maintain our forecasts, TP of RM115.00 and UNDERPERFORM call.

We came away from NESTLE’s results briefing feeling mixed on its prospects. The key takeaways are as follows:

1. No immediate plan to raise products price. NESTLE indicated that it has no immediate plan to raise product prices. It is mindful of the impact of price hikes on the demand for its products.

2. Resilient domestic sales, export demand face headwinds. NESTLE projects sustained growth in domestic sales in FY24, driven by marketing efforts and offering products that suit the local taste bud. The company's domestic sales remained robust in FY23, achieving a 10% YoY increase to RM5.7b. Conversely, its export sales fell by 9% YoY to RM1.4b due to weaker global demand. This trend underscores the ongoing challenges in international markets, with export sales likely to continue facing headwinds amidst subdued global demand.

3. Commodity price volatility is expected to persist. Spot prices of NESTLE’s key raw materials, i.e. sugar and cocoa, have risen 16% and 61% YTD, respectively, due to stronger demand, supply constraints and disruptions in key producer countries. On the other hand, prices for other key raw materials like corn and soybeans have weakened by 10- 15% YTD. NESTLE hopes to partially mitigate the higher commodity prices by boosting its domestic sales through the continued introduction of products tailored to local consumer preferences. In the recent quarter, NESTLE has further developed plant-based meals and drinks under its HARVEST GOURMET and GOODNES brands, introducing products like GOLDEN CRUNCHY POPPERS. It also launched ENERCAL COMPLETE to enhance its footprint in the premium adult nutrition segment. Additionally, new packaging for NESTUM and KITKAT was unveiled in line with the festive season (see Exhibits 1-4). However, these extensive product launches and increased brand promotion activities resulted in higher marketing expenses in 4QFY23.

Forecasts. Maintained.

Valuations. We also keep our DCF-derived TP of RM115.00 (based on WACC of 5.2% and TG of 2%). There is no adjustment to our TP based on ESG given its 3-star rating as appraised by us (see Page 5).

Outlook. We remain cautious on the company’s outlook. The absence of a significant recovery in margins suggests that it is still struggling to pass on higher input costs. Despite absorbing the higher input costs (by not significantly raising prices), there is still a risk that its customers may down trade, i.e. switch to cheaper alternatives, amidst sustained high inflation. Certain products, like cereal, milk and evaporated milk, could be more vulnerable than the others given their low brand equity.

Nonetheless, we take comfort in NESTLE’s wide range and variety of staple food products, which could cushion the impact of downtrading by customers, if it happens. Maintain UNDERPERFORM.

Risks to our call include: (i) a significant fall in commodities prices, (ii) a stronger MYR resulting in lower cost of imported raw materials, and (iii) consumers switching to food products of higher quality as purchasing power rises or inflation eases.

Source: Kenanga Research - 29 Feb 2024