Nestle Malaysia’s product innovation to fuel revenue growth
KUCHING: Nestle ( Malaysia) Bhd’s (Nestle Malaysia) product innovation is one of the key pillars of growth for the group and as such, analysts believe the group’s innovative products will continue to fuel revenue growth.
In the financial year 2015 (FY15), approximately RM400 million was generated from new product launches which account roughly 10 per cent of the group’s total revenue, MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research) highlighted in a recent report.
“We expect that product innovation will continue to fuel revenue growth as management guided that more than 50 per cent of the revenue growth of the first nine months of 2016 (9M16) was attributed to new product launches,” it said.
Meanwhile, MIDF Research also believed that Nestle Malaysia is capable of weathering the rise in operating and commodity costs.
“As Nestle Malaysia remains committed not to increase product prices, it has introduced efficiency programs along its supply chain to combat rising costs.
“At least RM188 million additional income was generated in FY15 through this initiative. While operating profit margin recorded for the first quarter of 2016 (1Q16) was of 21.7 per cent, it has been on a downward trend ever since which might suggest its existing cost saving initiatives might have reached its limit.
“Nevertheless, Nestle is on a continued effort to manage its expenditure with a global procurement hub expected to be launched in Malaysia in the first half of 2017 (1H17), marking one of three global procurement hubs in the world along with Switzerland and Panama.
“These hubs will provide a range of services, including the management of procurement for specific raw materials, packaging, indirect materials and other services,” the research team remarked.
It noted that agricultural commodities such as sugar, milk and coffee have reverted to pre-FY15 price levels.
“Along with depreciating ringgit, we expect that the gross profit (GP) margin to come under pressure and hit FY17 earnings as the commodities are imported from overseas and priced in US dollar.
“However, the shrinkage in GP margin might not be too significant as the management claimed that the group is hedged for most of FY17. In the group’s latest reported quarter, that is 3Q16, it recorded a fall in GP margin of minus 3.7 percentage points ( ppts) quarter- onquarter (q- o- q) to 38.9 per cent.
“Prior to the decline, quarterly GP margin for FY16 experienced on-year growth ranging between 0.9ppts to 3.6ppts. Due to this, we expect that the GP margin will maintain at circa 38 to 39 per cent levels,” it opined.
All in, MIDF Research revised its earnings forecast for FY16F and FY17F by minus 5.42 and minus 13.34 per cent respectively to be more in line with management guidance.
“The revision is due to the increase in commodity prices such as sugar, milk and coffee which will impact earnings in FY17.
“However, in the long term, the increase in raw material prices would be mitigated by the efficiency and cost management programs undertaken by the group,” it said.
Aside from that, MIDF Research highlighted that Nestle Malaysia saw strong growth from both domestic and export segments.
It noted that Nestle Malaysia’s domestic segment has delivered growth due to aggressive advertising and promotional along with new product innovation.
“As a result, Nestlé Malaysia’s domestic market share rose from 14.5 per cent (FY14) to 15.8 per cent in FY15 (1.3ppts year- on-year). In the meantime, the export segment has continued to perform well since its turnaround in 3Q15.
“Currently, exports make up 20 per cent of the group’s total revenue. The growth momentum is expected to continue as Malaysia is the halal hub for Nestlé worldwide and it ships out high quality locally produced halal products to over 50 countries worldwide,” it said.