Nestle in a bind as Malaysians ‘downtrade’ to cheaper brands

 

Nestle Malaysia has indicated that it will go slow on price hikes for its products moving forward. (Nestle Web pic)

PETALING JAYA: 

Trouble is looming for Nestle (Malaysia) Bhd as cash-strapped Malaysian consumers are increasingly ditching the products of the world’s biggest food company for cheaper alternatives.

Kenanga Research, which maintained its 

underperform

 call on the stock, said it came away from the company’s recent briefing for analysts 

feeling cautious

 on Nestle Malaysia’s prospects.

“Nestle revealed that the recent downtrading by consumers, i.e. the switching from Nestle to cheaper brands or the lower end of its product range, has been broad-based across all products.

This shows sustained elevated inflation is really eroding consumer purchasing power. Not helping either is the lingering boycott of certain Western products due to Israel’s war on Gaza,

 it said in a note yesterday.

The research house said its key products such as cereal, milk, and evaporated milk may be particularly vulnerable due to their lower brand equity.

Kenanga said Nestle Malaysia, a subsidiary of Switzerland-based Nestle SA, had indicated that it would be putting the brakes on price hikes moving forward.

Nestle (Malaysia) will go with the pricing strategy of Nestle SA to go slow on price hikes as consumers turn more cost-conscious.

The company had raised prices of its bestsellers including Milo, Nescafe, and Maggi tomato ketchup by approximately 5% to 6% from July 1 to mitigate the rising cost of raw materials.

Slump in Q2 net profit

In a bourse filing on July 26, the group announced that its net profit for the second quarter ending June 30, 2024 (Q2 FY2024) had plunged 48.3% to RM93.59 million from RM180.91 million a year ago.

Quarterly revenue fell by 13% to RM1.52 billion from a historic high of RM1.75 billion a year ago. The fall in profit was attributed to a decline in domestic sales driven by subdued consumer sentiment and constrained purchasing power.

Kenanga remains cautious on the company’s outlook. “Nestle anticipates challenging conditions will persist through Q3, with gradual improvement expected towards year end and a return to growth by the first half of 2025.

Additionally, gross profit margins are likely to remain under pressure due to the elevated prices of key commodities such as cocoa and coffee beans, driven by ongoing supply shortages,

 it said.

Nonetheless, Nestle Malaysia’s extensive range of staple food products could help to cushion the impact, said Kenanga, which has a target price (TP) of RM114.90 on the stock.

Meanwhile, Hong Leong Investment Bank (HLIB) has downgraded the company to 

sell

 from 

hold

 and cut its TP to RM101 from RM122.50 previously, following its disappointing Q2 results.

It said Nestle Malaysia’s results 

fell short of expectations

, meeting only 33% of its forecast and 38% of consensus estimates.

HLIB reduced its profit forecasts for Nestle’s financial year 2024 (FY2024) and FY2025 by 33% and 19% respectively.

Additionally, we reckon the boycott sentiment coupled with cost pressures will continue to put a strain on its earnings moving forward,

 it added.

Internationally, brands such as McDonald’s, Starbucks, Burger King and Nestle have come under fire for their perceived association with Israel in the ongoing Middle East conflict.

HLIB also highlighted concerns about Nestle Malaysia’s high valuation of 47.8 times its projected earnings for FY2024, especially when compared to its parent company’s much lower valuation of 17.9 times.

Given the persistent challenges and disappointing results, we find it difficult to justify the current high valuation of Nestle Malaysia,

 said HLIB.

Nestle has been present in Malaysia since 1912 and operates 12 manufacturing plants employing over 6,000 Malaysians.

Its shares fell RM4 or 3.6% yesterday to RM108.50, valuing the group at RM25.4 billion. It has fallen 7.8% year-to-date and 19% over the past year. - FMT