Broker: UOB Kay Hian
Date of Report: Friday, 25 July 2025

Nestle Malaysia 2Q25: Strong Export-led Growth, Margin Resilience, and ESG Progress – But Is the Valuation Too High?

Overview: Robust 2Q25 Performance, but Valuation Remains a Concern

Nestle (Malaysia) Berhad delivered a strong set of results for the second quarter of 2025, outperforming internal expectations and aligning with market consensus. Fueled by dynamic export growth and solid domestic sales performance, revenue and profit margins edged higher on a year-over-year basis. Despite these operational positives, analysts caution that Nestle Malaysia’s current valuation appears to have fully priced in these gains, prompting a maintained HOLD stance with a revised target price of RM82.00.

Company Snapshot

• Sector: Consumer Staples
• Business: Manufacture, distribution, and export of food and beverage products
• Share Price (as of report): RM82.32
• Target Price: RM82.00 (previously RM76.00)
• Market Capitalization: RM19,305.1 million (USD 4,557.5 million)
• Major Shareholders: Nestle SA (72.6%), Employees Provident Fund (9.3%), BlackRock (1.9%)
• Shares Outstanding: 234.5 million
• 52-Week High/Low: RM133.90/RM97.72

2Q25 Financial Highlights

Key Earnings and Sales Drivers

• Export Sales Propel Growth: Revenue surged 9.5% year-over-year, led by dynamic export sales. Malaysia’s position as Nestle Group’s largest halal manufacturing hub continues to be a competitive advantage.
• Domestic Resilience: Domestic sales also grew positively, with sustained strength in core product lines supporting market leadership.
• Gross Margins: Despite a 1.2 percentage point quarter-on-quarter dip to 29.7% in gross margin, the year-over-year margin improved by 0.6 percentage points, attributed to efficient pricing and scale economies.
• Low-Base Effect: The second half of 2025 is expected to benefit from easier YoY comparisons, supporting further earnings recovery.
• Dividend: Interim dividend per share declared at 70 sen, unchanged from 1H24.

Commodities and Cost Management: Margin Preservation in Focus

• Commodity Price Trends: Cocoa and coffee prices remain elevated compared to 2024 averages (+23% and +8%, respectively), while sugar prices have dropped 20%.
• Price Adjustments: In July 2024, Nestle implemented a 5–6% price increase on selected products, aiding in the protection of profit margins against rising input costs.
• Hedging Strategies: Effective hedging and a more favorable ringgit/US dollar exchange rate are expected to support margin stability in the near term.

Financial Forecasts and Key Metrics

Stock Impact: Easing Input Pressures and Upward Earnings Revision

• Commodities Relief: Lower sugar prices and hedging strategies are expected to sustain margins, despite persistent high costs for cocoa and coffee.
• Earnings Upgrades: 2025/26 earnings forecasts have been raised by 5.6% and 5.2%, respectively, to reflect improved sales and margin assumptions.
• Risks: Upside is capped by potential increases in operating costs and unfavorable commodity price movements.

Valuation and Recommendation

• Rating: HOLD maintained, as positives appear fully reflected in the share price.
• Target Price: Raised to RM82.00 (from RM76.00), using a DCF model (WACC 7.7%, terminal growth 4.2%), implying a 38.9x 2026F PE multiple.
• Valuation Context: While earnings have likely bottomed out and cost pressures are easing, the stock’s valuation remains relatively lofty.

Environmental, Social, and Governance (ESG) Initiatives

• Environmental:
  • 100% renewable electricity across all operations
  • Aiming for 100% use of natural refrigerants by end-2025
  • Targeting a 20% reduction in greenhouse gas emissions from 2018 levels by 2025
• Social:
  • Commitment to 100% sustainably produced key raw materials by 2030
• Governance:
  • Board gender diversity ratio of 4:3 (male:female)
  • 63% of board members are independent directors

Profit & Loss, Balance Sheet, and Cash Flow Highlights

Key Investment Metrics and Ratios

• EBITDA margin projected to rise from 13.3% (2024) to 15.2% (2026–2027)
• ROE expected to improve from 66.5% (2024) to 85.4% (2027)
• Debt to equity ratio to gradually decrease from 140.1% (2024) to 124.0% (2027)
• Net margin expands from 6.7% (2024) to 7.5% (2027)
• EPS growth forecasted at 8.2% (2025), 10.2% (2026), and 9.4% (2027)

Conclusion: Steady Fundamentals but Limited Upside

Nestle Malaysia continues to exhibit strong operational execution with export-led growth, gross margin resilience, and a disciplined approach to cost and sustainability. However, current valuations reflect these positives, limiting near-term upside potential. Investors are advised to maintain a HOLD, with eyes on margin trends, commodity costs, and further progress on sustainability initiatives.
Broker: UOB Kay Hian | Date: Friday, 25 July 2025