Sustained confidence in Nestle despite rise in global commodities

KUCHING: Analysts remain confident in Nestle (M) Bhd’s (Nestle) prospects, despite expectations that the recent soft rise in global commodity prices will continue.

The continuing trend of increasing global commodity prices, especially milk and coffeebased products is likely to restrain Nestle’s margins in the near term.

In spite of this, analysts are remaining confident in nestle due to its recent stellar performance as Nestle recorded a 4.8 per cent increase in its ninth month financial year 2016 ( 9MFY16) revenue to RM3.8 billion while net profit saw a healthy increase of 16.1 per cent year over year (yo-y) to RM570.2 million.

“Stripping out exceptional items, mainly forex, gains, core net profit (CNP) grew by 7.3 per cent y-o-y to RM547.2 million” noted the research arm of Affin Hwang Investment Bank Bhd (Affin Hwang Capital).

This is in line with both Affin Hwang Capital’s and consensus expectations, accounting for 81 per cent and 80 per cent of their full year forecasts, respectively.

Furthermore, Nestle’s 9MFY16 profit before tax ( PBT) also expanded by 12.5 per cent y-o-y to RM685 million.

The research arm of TA Securities Holdings Bhd ( TA Research) noted that these improvements were supported by higher domestic and export sales from successful marketing and promotions activities, improved efficiency in its production lines, favourable commodity prices, and a reduced tax rate of 2.7 percentage point.

This is indicative that Nestle possesses both the internal and operational competencies to maintain performance. However, there is some divergence in how Nestle will face these headwinds of the expected year end increase in global commodity prices.

Affin Hwang Capital is more confident in Nestle’s internal competencies as they explained “We continue to like Nestle’s solid brand name and product mix, which consists of nondiscretionary products, as well as the Group’s constant effort to improve and introduce new products.”.

As such, the research arm has decided to maintain their ‘Hold’ rating on Nestle with a 12month dividend discount model (DDM) based target price (TP) of RM78.80.

Conversely, TA Research is more optimistic in Nestle’s operational activities explained that their confidence in Nestle was founded on their “Fuel the Growth” strategy as the group continues to strive for higher efficiency in the supply chain which would help to buffer the cost increase in the future.

As such, Affin Hwang Capital has decided to maintain their ‘hold’ rating on Nestle with a 12month dividend discount model (DDM) based target price (TP) of RM78.80.

Meanwhile, TA Research took a bolder approach instead and upgraded their call from ‘hold’ to ‘buy’ while maintain its TP at RM88.16 per cent on DDM valuation with an assumed cost of equity (COE) of 6.8 per cent and a growth of 2 per cent.