KUALA LUMPUR: Nestle (Malaysia) Bhd is expected to experience a gradual but consistent resurgence in product demand in the latter months of the year, said CIMB Securities Sdn Bhd.
This expected recovery is driven by fundamental consumer needs and strategic business maneuvers, it said in a note.
According to the firm, Nestle Malaysia is preparing for a subdued revenue performance in the second quarter of 2024 (2H24) due to dampened consumer sentiment and boycott activities amid the ongoing unrest in the Israel-Palestine region.
"We expect Nestle Malaysia's topline in 2Q24 to face pressure due to current weak consumer sentiment and boycott activities due to the ongoing Israel-Palestine conflict.
"However, we believe that demand for Nestle Malaysia products should recover in the next six months, given that most products are daily essentials and benefit from strong brand positioning," said CIMB Securities in a note today.
Furthermore, the upcoming selling price hikes for specific items effective July 1, 2024, and new product launches are expected to support CIMB Securities' projected revenue increase for FY24F (+2.7 per cent yoy).
CIMB Securities estimated topline growth is lower than its average annual topline growth (+5.2 per cent yoy) over the past five years.
"While the 1Q24 GP margin of 33.4 per cent was ahead of our FY24 GP margin estimates of 32.9 per cent, we expect gross profit margins to taper down in the following quarters due to rising inflationary pressures and rising input costs," said the research house.
With Nestle Malaysia's first-quarter results meeting market expectations, CIMB Securities is maintaining its earnings per share and discounted dividend model-based target price for the fiscal years 2024 to 2026, set at RM131.80, with a cost of equity of 5.6 per cent and a growth rate of 3.0 per cent.
Despite Nestle Malaysia's high valuation compared to its peers in the consumer staples sub-sector, the research house believes it's justified.
This is because the company's products, like food and beverages, are essential items that people continue to buy even during economic downturns.
Also, Nestle Malaysia has strong brand loyalty and offers a wide range of products across different food categories, which helps stabilise its revenue.
"However, investors should be mindful of potential risks like changes in domestic sales and fluctuations in commodity prices, which could affect Nestle Malaysia's financial performance in the future," added CIMB Securities.