F&B sector’s gross profit margin to gradually improve
KUALA LUMPUR: Malaysia’s food and beverage (F&B) sector’s gross profit margin is expected to gradually improve in the coming quarters, analysts say.
According to the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), price correction was evident in some commodities like raw sugar, milk powder, cocoa and Arabica coffee beans since the beginning of financial year 2017 (FY17).
MIDF Research noted for instance, that the international raw sugar price has declined to 14 cents per pound level from the peak of 20.54 cents per pound, a decline of 32 per cent year on year (y-o-y).
“Nevertheless, this will not immediately translate into lower raw material costs as the selling price of refined sugar to the local F&B players is still fixed at higher price,” it said.
MIDF Research’s channel checks with MSM Malaysia Holdings Bhd, Malaysia’s largest sugar refiner revealed that despite the lower raw sugar prices, this would not translate directly to a lower wholesale prices to those F&B players which previously holds approved import permits (APs) as there are still leftover of permits where prices are fixed at RM2,780 per metric tonne (mt).
However, the research arm noted that the contract is expected to end in December, and hence, these F&B players would fully procure their refined sugar need at market rate.
It further noted that for the record, sugar comprises an estimated 10 to 15 per cent, 20 to 25 per cent and five to 10 per cent of Nestlé (Malaysia) Bhd (Nestle), Fraser & Neave Holdings Bhd (F&N) and Oldtown Bhd’s (Oldtown) total raw material costs respectively.
“All in, we expect that the gross profit margin will gradually improve in the coming quarters,” the
Nevertheless, this will not immediately translate into lower raw material costs as the selling price of refined sugar to the local F&B players is still fixed at higher price. MIDF Research
research arm said.
Meanwhile, MIDF Research highlighted that the F&B players are also facing intense competition locally as products being offered are homogeneous in nature.
“Also, any increase in prices need to be done carefully due to the recently enacted Anti-Profiteering Regulations,” it said.
“As maintaining market share remains the priority in current business environment, F&B players are also limited in their ability to increase prices in order to pass on the higher raw material costs to consumers.”
However, MIDF Research noted that the growth in private consumption remains decent with 6.6 per cent y-o-y and 7.1 per cent y-o-y in the last two quarters despite the latest 2Q17 Consumer Sentiment Index was at 80.7 which is still below the optimistic threshold level of 100.
The research arm further noted that this signals that consumers were willing to spend albeit cautiously.
“Hence, any top line growth can only be achieved on the back of aggressive marketing and promotional activities as well as new product innovation in order to entice consumer to spend.”
MIDF Research highlighted that as the competition in the local consumer market remained tight, F&B players are going through a period of operating consolidation for their local business.
The research arm pointed out that any unprofitable outlets for instance, were closed and as a result, more resources were being freed and reallocated in exploring untapped opportunities in overseas markets.
“Local consumer companies have seen increasing revenue contribution derived from overseas operation benefiting from this strategy mitigating the lackluster performance from the local operation.
“As disclosed by F&N and Oldtown, revenue growth from overseas operation is encouraging in comparison to the domestic operation,” it said.
However, MIDF Research was not able to determine the size of the growth in overseas operation for Nestlé and Spritzer Bhd (Spritzer) as the contribution from overseas was insignificant and hence, was not disclosed.
Nevertheless, based on F&N and Oldtown’s recent performance, the research arm expected that the growth of the F&B companies in the near term is highly dependable on the performance of their overseas operation.
Due to the normalisation of commodities prices as well as strengthening ringgit, MIDF Research expected that the cost of raw materials of F&B players would gradually improve in the coming quarters.
“While the impact of these will not be significant to the bottom line in the near term, the performance of F&B companies is dependent on the extent of the savings generated from its internal operating efficiency and cost management initiatives as well as the extent of its overseas operation for the time being,” the research arm said.
Hence, MIDF Research maintained its ‘neutral’ call due to the aforementioned reasons, with Spritzer as its top pick.