‘F&B sector likely to continue seeing shrinking margin’

KUALA LUMPUR: Fraser & Neave Holdings Bhd (F&N) and Nestle Malaysia Bhd have registered mixed financial results, dragged down by the local food and beverage (F&B) business segment, with the former’s latest earnings being lower than MIDF Research’s and consensus expectation.

Nestle’s results, however, were in line with the research firm’s and consensus expectation.

MIDF Research said Malaysian F&B players have seen shrinking margin which corresponded well to the surge in commodity prices starting from February 16.

The trend is expected to continue, it said in a report yesterday.

“We expect that margin compressions will continue for at least another two consecutive quarters. In line with the shrinking margin, share prices have started to fall from July 16.

“We presume that the commodity prices have between three to four months of lagging impact on the companies’ cost of sales, on the back of their average inventory turnover of approximately two to three months,” said MIDF Research.

After experiencing more than a year of declining trend from the beginning of last year, the prices of agricultural commodities, such as skim milk powder, coffee beans and raw sugar, have surged since February to even higher than the levels in 2014.

MIDF Research said F&N, Nestle and Dutch Lady have benefited from the subdued commodity prices for the past two years.

“Gross profit margin for these players has been on an increasing trend for seven consecutive quarters from the fourth quarter of financial year 2014 to the second quarter of financial year 2016,” it said.

As F&B players are limited in their ability to pass on these costs to consumers by raising selling price due to weak consumer sentiment and stiff competition, MIDF Research said strategies are in place to mitigate the rising commodity prices.

The strategies include product innovation, improving cost efficiency and productivity.

“We are not overly concerned on the commodity prices uptrend in the long term as we believe that local F&B players have taken appropriate measures through product innovation and improvement of internal operating efficiency,” said MIDF Research.

The firm has maintained a “neutral” call on the F&B sector, and has set a target price of RM25.32 for F&N and RM82.82 for Nestle.