NESTLE reiterated that it will go slow on price hikes to check further downtrading, i.e. the switching from Nestle to cheaper brands or lower- end of its product range by consumers. This has become even more critical given that the trading is broad-based across all products. We maintain our forecasts, TP of RM114.90 and UNDERPERFORM call.

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

1. Broad-base downtrading. NESTLE revealed that the recent downtrading by consumers, i.e. the switching from Nestle to cheaper brands or lower-end of its product range, had been broad-base across all products. This shows sustained elevated inflation is really eroding consumer purchasing power. No helping either, is the lingering boycott of certain Western products due to Israel’s war on Gaza.

2. Going slow on price hikes. As such, NESTLE will go with the pricing strategy of its parent Nestle S.A., i.e. to go slow on price hikes as consumers turn more cost-conscious.

Recall, it did raise prices of its best sellers, including Milo, Nescafe, and Maggi tomato ketchup, by approximately 5% to 6% from July 1, 2024, to partially mitigate the rising cost of raw materials such as cocoa and coffee beans.

3. Limited impact from the EPF’s account 3 withdrawal scheme. As expected, NESTLE did not sense any boost in demand for its products following the introduction of the EPF’s account 3 withdrawal scheme. According to the EPF, as of July 19, 2024, a total of RM8.9b has been withdrawn by 3.4m of its members.

Outlook. We remain cautious on the company’s outlook. NESTLE anticipates challenging conditions to persist through 3Q, with gradual improvement expected towards the end of the year and a return to growth by 1HCY25. Its key products such as cereal, milk, and evaporated milk may be particularly vulnerable due to their lower brand equity. Additionally, gross profit margins are likely to remain under pressure due to elevated prices of key commodities such as cocoa and coffee beans, driven by ongoing supply shortages. Nonetheless, NESTLE’s extensive range of staple food products could help to cushion the impact.

Forecasts. Maintained.

Valuations. We also keep our DCF-derived TP of RM114.90 (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).

Investment case. We like NESTLE for its strong brand and diversified product range, and the inelasticity in the demand for staple food products. However, recent experience has shown that it is vulnerable to downtrading by consumers amidst sustained elevated inflation. 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 - 30 Jul 2024