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Shares in Nestlé (Malaysia) Bhd (KL) dropped to their lowest point in over three months following weaker-than-expected quarterly results.
On Friday, Nestlé shares fell by RM3.10 or 2.5% to RM118.90, marking their lowest since April 4. The stock traded at RM119 at 9.15am, giving the company a market capitalisation of nearly RM28 billion on Bursa Malaysia. At least two research houses downgraded their recommendations for the stock to “sell.”
The first-half net profit of RM289 million fell short of expectations, accounting for only 37% of the consensus full-year forecast. This led analysts to reduce their earnings forecasts.
“We reckon [that] Nestlé will continue to face challenges with uncertainty from volatility in commodity [prices], coupled with weakening currency,” said Hong Leong Investment Bank (HLIB). “Sales will take time to normalise, considering the still intense Israel-Gaza conflict that is unfortunately seeing no signs of abating.”
HLIB downgraded the stock to “sell,” citing its “relatively high valuation” at nearly 48 times forward earnings, compared to its Swiss parent company’s 18 times, which is harder to justify amid declining earnings.
Nestlé shares have fallen over 8% from this year’s peak in May. Despite selling food and beverage staples, Nestlé has performed better than its peers in the consumer sector selling non-essential products.
Nestlé, Starbucks, and McDonald’s have faced intense boycotts in Malaysia due to their perceived links to Israel amid the ongoing Gaza conflict.
Among 13 research houses, nine have the stock on a “hold” call, three on “sell,” and only one recommends “buy.” The consensus 12-month target price is RM120.87, according to Bloomberg.
Following the latest cuts, Nestlé is expected to make a net profit of RM777 million for 2024.
Nestlé SA, the parent company, has reduced its full-year sales growth target to 3% from 4%, while slowing price hikes. Kenanga Investment Bank (Kenanga IB) expects Nestlé Malaysia to follow suit and has the stock on an “underperform” call.
Previously, Nestlé Malaysia raised prices for at least 20 products to protect margins against higher commodity prices.
Despite its strong brand and diversified product range with inelastic demand, “recent experience has shown that it is vulnerable to downtrading by consumers, amid sustained elevated inflation,” Kenanga IB warned.
Key Takeaways:
- Nestlé Malaysia shares fell to RM118.90, the lowest in over three months.
- First-half net profit of RM289 million missed expectations, leading to downgrades.
- Challenges include commodity price volatility, weakening currency, and the Israel-Gaza conflict.
- The stock has a high valuation at 48 times forward earnings.
- Intense boycotts in Malaysia due to perceived links to Israel.
- Consensus 12-month target price is RM120.87.
- Expected net profit for 2024 is RM777 million.
- Price hikes have been implemented to protect margins.
- Vulnerability to consumer downtrading amid elevated inflation.
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