KUALA LUMPUR: Demand for Nestle (M) Bhd's products is expected to be affected as price sensitivity might motivate consumers to switch to more affordable options in the near term.
In a note today, Hong Leong Investment Bank (HLIB) Research said although the initiatives on internal savings and hedging policy, the prolonged volatility of commodity prices prompt Nestle to increase shelf prices across different segments of its products.
Meanwhile, HLIB noted that Nestle would reformulate its products to bring down sugar content to be within the non-taxable limit for the sugar tax on pre-mixed drinks.
"In the recent tabling of Budget 2022, the government intends to extend the imposition of excise duty on the sugary beverage to include pre-mixed drink products in the form of chocolate, cocoa, malt, coffee and tea.
"We understand that Nestle will reformulate its products to bring down sugar content to be within the non-taxable limit.
"This is in line with the company's commitment to produce healthier and more nutritious products, at the same time cater to local taste buds," it said.
The bank-backed research firm has adjusted Nestle's financial year 2022 (FY22) forecast downward by -10 per cent to account for the prosperity tax.
HLIB maintains its 'Sell' call for Nestle with a slightly lower target price of RM107 from RM107.25.
"We continue to believe Nestle trades at an unreasonably high valuation level of 54.5x FY21 earnings per share and yielding an unattractive 1.8 per cent.
"Additionally, we opine the larger macro factors such as steeper raw material costs and higher freight costs are expected to be banes for the company," it said.