HAVING proven its resilience to withstand a stormy business environment in 1H 2022, Nestlé (M) Bhd – currently the priciest stock on Bursa Malaysia – is likely to once again embrace the headwinds of 2H 2022 with flying colours as it did quarters after quarters, financial years after financial years.
Will Malaysia’s leading food company be able to repeat its feat of proving stock analysts wrong yet again by withstanding acute volatility as evident by its mere 7% gap in its 52-week share price range of RM130.50-RM140?
At its latest 2Q FY2002 results briefing, Hong Leong Investment Bank (HLIB Research) said it remains cautious on the various headwinds especially with the volatile supply of harvest due to the drought and climate change.
This is despite its management sharing that consumer demand has been robust domestically on the back of full re-opening coupled with the minimum wage increase.
“We gathered that the group is experiencing pronounced commodity cost in 1H 2022. This remains the main challenge for the group signalling from the unwavering increase across the board,” observed analyst Syifaa’ Mahsuri Ismail in a company update.
“Despite the initiatives on internal savings and hedging policy, the prolonged volatility of commodity prices (has) prompted Nestlé to further increase shelf prices across different segment of its products.”
Without any quantum given, Nestlé Malaysia’s management has nevertheless assured that the price hike put in place has been moderate and the group would still have to absorb some of the cost pressure.
“This is to ensure that Nestlé’s products remain competitive in the market,” justified HLIB Research which reiterated its “hold” rating on the company with an unchanged target price of RM121.60.
“We note that the reduction in COVID-19 related expenses should help ease the pressure on its bottom line.”
Meanwhile, CGS-CIMB Research deemed Nestlé Malaysia’s stellar 1H FY2002 net earnings which matches 63.3% of its and 61.9% of Bloomberg consensus FY2022F estimates “as within expectations” in anticipation of a weaker 2H FY2022F.
According to the research house, Nestlé Malaysia’s 2Q FY2022 core net profit came in at RM169.3 mil (+23.7% year-on-year [yoy]) thus bringing its 1H FY2022 core net profit to RM374.4 mil (+21.0% yoy) (this excludes a one-off net gain of RM400,000 mainly from reversal of provision for inventories).
Above all else, Nestlé Malaysia has also declared an interim dividend of 70 sen/share which amounts to RM164.15 mil in respect of its FY2022 ending Dec 31, 2022.
“We expect Nestlé to post weaker half-on-half results in 2H FY2022F,” suggested analyst Walter Aw who retained a “hold” rating on Nestlé Malaysia with a lower discounted cash flow (DCF)-based target price of RM133.90 (from RM135 previously).
“This is mainly due to a high base in 1H FY2022 from festivities (Chinese New Year and Hari Raya). Also, we see multiple headwinds (higher commodity prices, inflationary pressures and lower spending power) which could lead to lower sales and margin compression.”
Nevertheless, CGS-CIMB Research expects demand for Nestlé Malaysia’s products to be relatively ‘inelastic’ as it offers daily necessities. “In addition, we believe that Nestlé could be a potential beneficiary of consumer downtrading, driven by higher in-home food consumption,” added the research house.
At 11.05am, Nestlé Malaysia was untraded at RM134.70 with a market capitalisation of RM31.59 bil. – Aug 1, 2022
