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Hedging policy keeps its profit margins protected

“We see minimal downside risks to its rich valuation, given the defensive nature of its business and scarcity premium for large-cap consumer stocks.” RHB Research

PETALING JAYA: While rising commodity prices pose a challenge to the food and beverage industry this year, Nestle (M) Bhd will likely see its margins somewhat protected, thanks to the company’s hedging policy.

Analysts in general continue to like the company for its resilience and market-leading position in the fast-moving consumer good (FMCG) sector, as well as its attractive dividend yield.

CGS-CIMB Research upgraded its rating on nestle to “hold” from “reduce” previously, saying it believed the group’s valuations would be supported by the defensive nature of its business and its strong global brand name.

The brokerage also raised its target price for Nestle to RM136.70 per share from RM109.10 previously, after raising its earnings estimate for the company by 4.2%-5.2% for the financial years ending Dec 31, 2021, to 2022.

“We expect Nestle to start rolling out plant-based products in the first half of 2021, with the recent completion of its specialised plant-based facility,” CGS-CIMB Research said.

UOB Kay Hian Research said although commodity prices could further trend upwards in tandem with inflation, Nestle had largely secured its prices for its raw material purchases. Therefore, Nestle could still secure its margins if its hedging cycle coincides with commodities prices normalising, it said.

The brokerage maintained its “hold” call on Nestle, with an unchanged target price of RM129 per share, implying 2021 price-earning ratio (PER) of 51.1 times.

“We like Nestle for its brand equity, defensive qualities amid flight to safety and consistent earnings growth,” UOB Kay Hian said, adding that Nestle also offered decent dividend yields of 1.9%-2.3% over 2021-23.

Aminvestment Research said it also like Nestle for its established presence and market-leading brand in Malaysia in the FMCG space and its continued efforts to streamline its operations, which should translate into improved margins.

“Looking ahead, we see the uptrend in the prices of many key commodities continuing into the first half of 2021. We believe this will negatively affect Nestle’s margins in the financial year ending Dec 31, 2021,” Aminvestment Research said.

“On a positive note, the squeeze in margins may be cushioned by Nestle’s policy of hedging its raw materials by six months,” it added.

Aminvestment Research raised its fair value for Nestle to RM117 from RM110.71 previously. It, however, maintained its “underweight” rating on Nestle as it said the counter was fully valued.

RHB Research, on the other hand, maintained its “neutral” call on Nestle, with an unchanged target price of RM128, implying 5% downside and around 2% yield.

“We see minimal downside risks to its rich valuation, given the defensive nature of its business and scarcity premium for large-cap consumer stocks,” the brokerage said.

It expected Nestle to see earnings growth of 19% this year, driven by new product launches, cost optimisation and recovery in consumer demand.

Nestle posted marginal net profit growth of 0.5% year-on-year (y-o-y) to Rm132.49mil in the fourth quarter of 2020, as a recovery in local sales and exports ended its three consecutive quarters of bottomline contractions. Revenue in the October-december 2020 period rose 3.1% y-o-y to Rm1.37bil.