Nestle expects higher profit margin in 2018

KUALA LUMPUR: Nestle (Malaysia) Bhd is aiming for a higher profit margin in 2018 on the back of lower commodity prices and the strengthening of the ringgit.

“The gross margin will improve as commodity prices have started to decrease and the ringgit has appreciated. We also have been able to further increase our efficiency and in the supply chain.

“That’s why we’re quite confident that our gross margin will improve compared with 2017 and close to the level achieved in 2016,” Nestle CEO Alois Hofbauer said at a press conference after the group’s AGM today. Its gross margin stood at 50% and 36.7% in 2016 and 2017, respectively.

MIDF Research concurred that its gross profit will improve in the coming quarters but cautioned that its earnings growth will be partially mitigated by higher advertising and promotion expenses and higher effective tax rate.

It is maintaining a “neutral” call on Nestle as the expectation of better earnings prospect in FY18 have been priced into the current valuation. The target price, however, has been revised upward to RM132.32.

Nestle recorded a marginal increase in its net profit for the first quarter ended March 31, 2018 to RM231.22 million from RM230.69 million a year ago.

Despite that, he believes the group will continue to register growth in 2018, underpinned by the market demand for its products. Nestle’s market share was the highest in the local food and beverages market with 15.5% in 2017.

Meanwhile, Hofbauer did not state directly if there will be any hike in the product prices within the year.

“It’s our last resort, we strive to improve internal and external efficiencies. Of course, it will not be neglected if needed, but we love to grow our volume first, while price is something we do in a responsible and sensitive manner.”

For 2018, Nestle will launch 40 to 50 new products, which are expected to contribute to 10% of its domestic sales.

Nestle has allocated RM180 million in capital expenditure for capacity expansion this year, while the budgeted marketing and trade expenses is RM1.2 billion.