We came away from Nestlé (Malaysia) Bhd’s virtual analyst briefing with the following key takeaways:

1. No price adjustment in 1HFY24, likely in 2HFY24

2. Focus on ESG initiatives to ensure sustainability of business.

3. Cautiously optimistic on the market sentiment. Downgrade to Sell with a lower target price of RM132.50/share (from RM151.30/share) based on DDM valuation (k: 6.4%; g: 3.0%).

No price adjustment in 1HFY24, likely in 2HFY24

Management guided that the cost of raw materials such as the cocoa (USD$6,524/Tonnes) and coffee (USD$192.75/lbs) are trading within a stable range but still on a high side. In the near term, Nestlé expects there will be no price adjustment in 1HFY24 bearing that the key input cost is not experiencing substantial hike for the coming 1HFY24. Therefore, we reckon that the upcoming quarterly gross profit margin to hover at c.28%-30% due to the recent decline in raw material price (sugar).

Focus on ESG initiatives to ensure sustainability of business.

Apart from its financial performance, the group is also focusing on its ESG efforts whereby the group has entered a partnership with Malaysia Cocoa Board to support the local farming communities and shape the supply chain of Cocoa. YTD, Nestlé has contributed RM3.5mn to the community to aid various relief efforts with the collaboration of Malaysian Red Crescent Society.

Remaining cautious on the market sentiment

Nestlé is cautiously optimistic about FY24 due to following reasons: i) fluctuation of commodity price may persist, ii) weakening currency will lead to a margin erosion as cost of procurement increase, iii) unclear guidelines on the reform of subsidy rationalism. Moving forward, management will review its products frequently to ensure the competitiveness on shelf to cater the slower growth due to the uncertainty of global economics outlook.

Impact

No change to our earnings projections.

Valuation

We maintained Hold on the stock with a revised target price of RM132.50/share based on DDM valuation (k: 6.4%; g: 3.0%) after inputting FY23 figures.

Source: TA Research - 29 Feb 2024