Nestle Malaysia (NESZ MK) Stock Analysis: BUY Rating Maintained on Recovery Outlook | Maybank IB (April 2025)

Maybank Investment Bank Berhad April 30, 2025
Nestle Malaysia (NESZ MK): Navigating Cost Pressures Towards Gradual Recovery – BUY Maintained
Maybank Investment Bank Berhad maintains its positive outlook on Nestle (Malaysia) Berhad (NESZ MK), reiterating a BUY recommendation with an unchanged Discounted Cash Flow (DCF) derived Target Price (TP) of MYR 96.70. This suggests a potential upside of 17% from the current share price of MYR 84.22. While near-term sequential earnings in 2Q25 and 3Q25 might soften due to the absence of festive-driven spending, the investment bank believes the waning effects of previous consumer hesitancy will underpin a gradual volume recovery throughout the fiscal year 2025 (FY25E).

1Q25 Performance and Forward Guidance

Following Nestle Malaysia’s 1Q25 results briefing, management attributed the robust +20% quarter-on-quarter (QoQ) revenue growth to two key factors:

• Price adjustments implemented in June and December 2024, primarily affecting coffee and cocoa products.
• Organic improvements in volume growth compared to the previous quarter.

The company’s forward guidance remains consistent, anticipating a gradual yet healthier earnings recovery by the end of the first half of 2025 (1H25), driven predominantly by topline growth. Management is confident that the positive momentum observed is sustainable, supported by the diminishing impact of consumer boycotts.

Persistent Input Cost Challenges

Despite the positive outlook, Nestle Malaysia acknowledges ongoing challenges from input costs. The Average Selling Prices (ASPs) for key raw materials, specifically cocoa and coffee, remain elevated. Consequently, the company anticipates that input cost pressures will likely persist throughout FY25E. This suggests that gross profit (GP) margins, which stood at 31% in 1Q25 (up from 26.7% in 4Q24), have not yet fully stabilized.
To mitigate these pressures, Nestle Malaysia is actively implementing internal cost management strategies. Furthermore, volume growth in its non-coffee/cocoa product segments is expected to help offset margin compression in affected categories. While the company does not rule out further price adjustments if raw material costs continue their upward trend, it maintains that such increases would only be considered as a last resort.

Improving Outlook and Earnings Estimates

Although challenges in sales growth and margin defense persist, Maybank IBG believes Nestle Malaysia is firmly on the path to recovery. The 1Q25 earnings performance serves as evidence that the negative effects of consumer boycotts are gradually fading.
Maybank IBG keeps its earnings estimates for Nestle Malaysia unchanged. The financial model incorporates expectations of:

• +6% year-on-year (YoY) revenue growth for FY25E.
• A Gross Profit (GP) margin of 29% for FY25E.

Financial Highlights and Forecasts

Here’s a summary of Nestle Malaysia’s historical and projected financial performance:

Valuation Context

Nestle Malaysia’s valuation is assessed using a DCF model, assuming a Weighted Average Cost of Capital (WACC) of 6.3% and a Long-Term (LT) growth rate of 2.5%.
Historical valuation metrics provide context:

• Forward P/E Ratio: The one-year forward P/E ratio has historically averaged 40.3x, with a range typically falling between 26.7x (-1 standard deviation) and 53.9x (+1 standard deviation). The current forward P/E based on FY25E is 45.2x.
• Forward Dividend Yield: The one-year forward dividend yield has averaged 2.7%, historically ranging between 1.8% (-1 SD) and 3.7% (+1 SD). The projected yield for FY25E is 2.2%.

Key Risk Factors

Investors should consider the following risks associated with Nestle Malaysia:

• Raw Material Price Volatility: Significant spikes in raw material prices (like cocoa and coffee) could negatively impact earnings.
• Foreign Exchange Fluctuations: A sharp appreciation of the US Dollar (USD) against the Malaysian Ringgit (MYR) could adversely affect earnings, as approximately 50% of raw material requirements are denominated in USD. However, the company’s export sales, constituting about 20% of total sales, provide a partial natural hedge against this risk.

Company Snapshot

Nestlé (Malaysia) Bhd. operates as an investment holding company, primarily engaged in the manufacturing, marketing, and sale of food products in Malaysia.

• Ticker: NESZ MK
• Sector: Consumer Staples
• Shariah Compliant: Yes
• Market Capitalisation: MYR 19.7B / USD 4.6B
• Issued Shares: 235 million
• Free Float: 12.8%
• 52-Week High/Low: MYR 129.80 / 62.24
• 3m Avg Turnover: USD 1.0 million
• Major Shareholders: Nestle SA (72.6%), Employees Provident Fund (13.5%), The Vanguard Group, Inc. (1.0%)

ESG Analysis: An Above-Average Performer

Nestle Malaysia demonstrates a strong commitment to Environmental, Social, and Governance (ESG) principles, scoring above average in Maybank IBG’s proprietary scoring methodology with an overall score of 65/100 (where 50 is average).
ESG Risk & Controversy:

• Sustainalytics Risk Rating: 19.3 (Low Risk) as of June 27, 2024. This score assesses unmanaged ESG risks to enterprise value.
• Score Momentum: -1.6, indicating an improving risk score since the last update.
• Controversy Score: Category 1 (Negligible Risk) related to Business Ethics (IP), updated August 29, 2024.

Business Model & Industry Issues:

• NESZ leads in sustainable sourcing with clear frameworks for traceability and farmer support.
• The company faces challenges with its goal of 100% recyclable packaging by 2025 due to potential cost increases for recycled materials and the broader issue of low actual recycling rates globally (c.10%).
• Its ESG strategy, covering waste, pollution, and product health/safety, is comparable to peers.

Material Environmental (E) Issues & Targets:

• Packaging: Committed to 100% recyclable/reusable packaging by 2025 (currently 75% designed for recycling). Redesigned Nescafe/Milo products for efficient plastic use. Introduced 100% paper straws for UHT range. Target to reduce virgin plastic by one-third by 2025 and achieve plastic neutrality by 2025.
• GHG Emissions: Target: Reduce by 20% by 2025 (vs. 2018), halve by 2030, net zero by 2050. Achieved 6.94% reduction towards 2030 goal. Reduce specific GHG emissions by 5% p.a. (49% achieved).
• Renewable Energy: Achieved 100% renewable electricity (solar & hydro) at all Malaysian facilities via Green Energy Programme and RECs, meeting the 2025 target.
• Water Management: Reduced water usage per tonne by 20% since 2015. Treats 100% of factory wastewater (removing 96% organic load).
• Deforestation & Agriculture: Committed to zero deforestation. 100% RSPO certified palm oil (target 100% by 2030, 71% achieved). Target 100% assessed deforestation-free by end 2022 (96% achieved). Aiming for 20% key ingredients via regenerative agriculture by 2025, 50% by 2030 (vs. 2018).
• Waste Management: Diverts most manufacturing waste to animal feed, recycling, fertilizer, or waste-to-energy incineration.

Key Governance (G) Metrics & Issues:

• Board Structure: 8 directors in 2023; 5 independent (63%), 1 non-independent non-executive (Chairman), CEO & CFO (executive). Chairman and CEO roles are separate.
• Diversity: 37.5% female board representation (3 out of 8 members).
• Director Rotation: One-third retire annually by rotation, eligible for re-election. Annual shareholder approval needed for independent directors beyond 9 years; none currently beyond 12 years.
• Committee Leadership: Governance, nomination, and compensation committee led by the Chairman, deviating from the norm of an independent director chair.
• Remuneration: CEO total pay (MYR 5.0m) was 0.6% of 2023 pre-tax profit. Board salary was 1.26% of reported net profit in 2023.
• Audit: Audited by Ernst & Young PLT. Lead audit partner rotated every 7 years.
• Related Party Transactions (RPTs): Recurring RPTs mainly involve purchases from/payments to other Nestle affiliates globally (raw materials, finished goods, royalties, IT services).

Material Social (S) Issues:

• Responsible Sourcing: Implemented global Responsible Sourcing Standard (RSS) in 2018, aligned with OECD and UN SDG standards, ensuring product health and safety.
• Farmer Support: Actively supports local farmers (chilli, paddy, coffee) via rural development and contract farming initiatives, providing training and assistance to improve yields and quality.
• Workforce: Total workforce of 5,336. In 2023, 57.6% of leadership positions were held by women. Lost time injury frequency (LTIF) rate was 1.3 in 2023.
• Community/Health: Involved 25,726 students in Nestle for healthier kids program in 2023. Had 41 products certified with healthier choice logo in 2023.

ESG Scoring Methodology: Maybank IBG’s proprietary ESG score is based on:

• Quantitative Parameters (50% weight): Based on reported metrics.
• Qualitative Parameters (25% weight): Based on policies, frameworks, and disclosures (e.g., ESG policy, TCFD reporting, Scope 3 mechanism).
• ESG Targets (25% weight): Based on stated goals and progress.

Scores (+1 for positive, -1 for negative, 0 for unavailable) are assigned to sub-parameters, averaged for each category, and then weighted. A minimum score of 50 is needed for an average rating. Nestle’s score breakdown: Quantitative (47/100), Qualitative (67/100), Target (100/100), resulting in the overall 65/100.
ESG Quantitative Data Summary (vs. FNH MK for context where available):

*(Note: Some data points like Scope 2 for 2022/23 seem missing in the source data table)*

Historical Recommendations

Maybank IBG’s rating on Nestle Malaysia has evolved over the past couple of years. Notably:

• The rating was upgraded from HOLD to BUY on October 25, 2024, with a TP of MYR 111.50.
• The rating was adjusted back to HOLD on February 26, 2025, with a TP revision to MYR 96.70.
• The current BUY rating was reinstated on April 28, 2025, maintaining the MYR 96.70 TP.

Prior to October 2024, the stock carried SELL or HOLD ratings with higher target prices, reflecting changing market conditions and company performance.

Analyst Certification and Disclosures

The views expressed in this report accurately reflect the personal views of the analyst(s) covering Nestle Malaysia. No part of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed. Maybank IBG and its affiliates may from time to time have positions in, act as market maker, assume underwriting commitments, or provide investment banking, advisory, and other services for companies mentioned, including Nestle Malaysia. Investors should be aware of potential conflicts of interest.