NESTLE is contemplating selective price increases in the confectionery category. Spot prices of its key raw materials, i.e. sugar and cocoa, have risen recently but those of corn and soybeans have eased. It will also partially mitigate the higher commodity prices by introducing high-margin new products. 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. Selective price increases. NESTLE hinted at potential adjustments for selected products without directly confirming recent reports of price hikes in specific products, including breakfast cereals, Nescafe, coffee creamer, and milk powder (reported to have been raised by 5%−15% from Sep 2023). NESTLE has not restrained itself from raising prices. It said that its 9MFY23 top line growth was driven by a combination of higher volume and prices (although the price hikes had not fully offset the higher input costs, as reflected in a slight decline in margins). Furthermore, in a recent earnings call, Nestle SA, NESTLE's parent company, mentioned the possibility of selective pricing actions in the confectionery category due to elevated cocoa and sugar prices. This suggests that there may be price adjustments for confectionery products such as Milo, KitKat and L’ATELIER.

2. Commodity prices are expected to remain volatile. Spot prices of NESTLE’s key raw materials, i.e. sugar and cocoa, have both risen over 30% YTD 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 15−30% YTD. NESTLE will partially mitigate the higher commodity prices by introducing high-margin new products. In the recent quarter, Nestlé expanded into dairy-free drinks with Nestlé GOODNES (oat & almond). New ice cream products, including Nestlé MILO Kaw and LA CREMERIA flavours, were also introduced. The popular Nestlé Boba Brown Sugar now comes in a take-home pint, along with limited-edition treats like KitKat Salted Caramel Cookies and MAGGI Noodles Cili Ala Kampung in bowl format (see Exhibit 1). On the flip side, these extensive product launches, combined with intense brand events and activities, led to higher marketing costs in 3QFY23.

Forecasts. Maintained.

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 4).

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 downtrade, 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) 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 and inflation eases.

Source: Kenanga Research - 30 Oct 2023