Nestle to feel pressure from costlier raw materials: OSK

However, this growth estimate is half of the net profit growth Nestle reported last year. It saw net profit grow 17 per cent to RM340.9 million in the financial year ended December 31 2008 from RM292.0 million a year ago.

OSK Research warned that rising raw material cost will put pressure on the company's profitability as raw materials make up 60 per cent of costs in its manufacturing operation.

"We believe Nestle may experience margin squeeze in production should raw material prices move up again," it said in a report yesterday.

Still, the local research firm reckons that Nestle will remain a resilient play given that it has a diverse and balanced portfolio of essential food products and impulse food products such as confectionery and ice-cream catering to all stages of life.
"Nestle has consistently grown its revenue in spite of pressures from economic recessions. We believe Nestle would continuously adapt its products to the changing consumer taste and capture new markets such as its nutritious products for health conscious consumers and halal products for exports," it said.

The company added that in view of the economic slowdown, more consumers are expected to opt for cheaper meals or cook at home more.

"Hence, we think the Maggi range would benefit from such behaviour as Maggi products (instant noodle and culinary aids) are cheap, convenient and easy to cook," it said.

OSK Research has re-initiated coverage on Nestle with a "neutral" call at a target price of RM29.80.

It said the recommendation takes into account the poor liquidity and limited investment opportunities due to the small free float in the market.

"Given that Nestle SA (the world's largest food and beverage company) owns 72.5 per cent of Nestle Malaysia, its available free float is rather limited at 48 million shares. As such, there are constraints on investment opportunities.

"Furthermore, as Nestle has strongly outperformed the Kuala Lumpur Composite Index by 30 per cent over the last one year, we do not see much potential upside to the stock," it said.