Nestlé Malaysia Faces Tough Quarter Amid Weak Domestic Demand and Rising Costs

Nestlé (Malaysia) Berhad’s 9MFY24 performance has fallen short of expectations, with a marked decline in both revenue and profit, underscoring the challenges the company is facing in a tough economic environment.

Weaker domestic sales, rising costs, and shifting consumer preferences have significantly impacted the company’s performance, leading to a downward revision of its target price from RM126.00 to RM109.90. Despite these setbacks, the company maintains a NEUTRAL rating, reflecting both caution and a modest outlook for recovery.

Nestlé Malaysia: Key Financial Highlights

For 9MFY24, Nestlé Malaysia reported a revenue of RM1.45 billion for 3QFY24, representing a decline of 5.1% quarter-on-quarter (QoQ) and 18.4% year-on-year (YoY). Net profit for the period also showed a stark decline, falling 28% YoY, bringing the nine-month total to RM374.5 million, far below analyst expectations. The key drivers for this disappointing performance include weaker domestic demand, rising input costs for commodities like cocoa and coffee, and shifting consumer preferences likely influenced by the ongoing Israel-Gaza conflict.

Market and Consumer Challenges

Domestic demand in Malaysia has been weakened by inflationary pressures that are eroding consumer purchasing power. As consumers shift their preferences towards local brands and more essential goods, Nestlé Malaysia’s sales performance has been hit hard. Additionally, geopolitical factors such as the Israel-Gaza conflict appear to be impacting consumer choices, adding to the company’s woes.

On top of these challenges, the company is grappling with higher input costs for raw materials and increased transportation and warehousing expenses, all of which have squeezed margins. While core PATANCI (Profit After Tax and Non-Controlling Interests) showed a slight QoQ improvement (+3.6%), the modest gain was not enough to offset broader cost pressures and declining sales.

Outlook for Nestlé Malaysia

Looking ahead, Nestlé Malaysia expects these market challenges to persist throughout the remainder of FY24. Weak consumer sentiment is likely to continue due to inflationary pressures and cautious spending patterns. Additionally, the impact of global geopolitical issues, particularly the Israel-Gaza conflict, may continue to influence consumer behavior negatively.

As a result, analysts have revised down earnings estimates for FY24-26, cutting core earnings projections by 26% for FY24. Nestlé is expected to continue facing pressure from higher costs and soft domestic demand, and while there may be modest price returns for investors, the total expected return stands at just 9.6%, reflecting a cautious outlook.

The company’s reduced dividend of 35 sen per share, down from 70 sen in the previous year, further highlights the impact of these headwinds on its financial position.

Difficult Landscape

Nestlé Malaysia is navigating a difficult landscape, with both macroeconomic and geopolitical factors weighing on its performance. While it maintains a NEUTRAL rating,

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