‘Hold’ stance on Nestle Malaysia stays
KUALA LUMPUR: Nestle (Malaysia) Bhd is expected to experience a gradual but consistent resurgence in product demand in the latter months of the year, said CIMB Securities Sdn Bhd.
This would be driven by fundamental consumer needs and strategic business manoeuvres, it said in a note yesterday.
The research firm said Nestle Malaysia was preparing for a subdued revenue performance in the second quarter due to dampened consumer sentiment and boycott activities amid the unrest in the Middle East.
“We expect Nestle Malaysia’s top line in the second quarter to face pressure due to current weak consumer sentiment and boycott activities arising from the Israel-Palestine conflict.
“However, we believe that demand for Nestle Malaysia products should recover in the next six months, given that most products are daily essentials and benefit from strong brand positioning.”
Furthermore, the upcoming selling price hikes for specific items effective July 1 and new product launches are expected to support CIMB Securities’ projected 2.7 per cent year-on-year revenue increase for financial year 2024.
The research firm estimated that top line growth was lower than the average annual growth (+5.2 per cent year-on-year) over the past five years.
“While the first quarter gross profit margin of 33.4 per cent was ahead of this year’s gross profit margin estimates of 32.9 per cent, we expect it to taper down in the following quarters due to rising inflationary pressures and rising input costs.”
With Nestle Malaysia’s firstquarter results meeting market expectations, CIMB Securities is maintaining its financial years 2024 to 2026 earnings per share forecasts as well as discounted dividend model-based target price of RM131.80, with a cost of equity of 5.6 per cent and a growth rate of 3.0 per cent.
It also kept its “hold” rating on the company.
Despite Nestle Malaysia’s high valuation compared to its peers in the consumer staples sub-sector, the research house believed that it was justified.
It said Nestle Malaysia had strong brand loyalty and offered a wide range of products across different food categories, which helped to stabilise its revenue.
“However, investors should be mindful of potential risks like changes in domestic sales and fluctuations in commodity prices, which could affect Nestle Malaysia’s financial performance in the future,” added CIMB Securities.