High prices may affect Nestlé’s plant-based market prospects

by TMR / pic source: Harvest Gourmet MY’s Facebook

GROWING trend for plant-based products will provide an upside potential for Nestlé (M) Bhd but it will not be immediate, stated MIDF Research. 

Nestlé has invested RM150 million to set up a plant-based meals solution manufacturing facility in Shah Alam, Selangor, being the first of its kind in South-East Asia, and one of the two in Asia after Tianjin, China. 

The halal-certified products will cater to both the local and export markets under its Harvest Gourmet brand. 

Nestlé is also developing a wide variety of dairy alternatives made from pea, rice, oat, soy, coconut and almonds for both powdered and ready-to-drink beverages. 

Under the Harvest Gourmet brand, there are five types of meat-free burgers and fillets, made from plant-based proteins derived mainly from soy and wheat. 

“By looking at its European focused plant-based Garden Gourmet brand which consists of seven different plant-based products, we expect Harvest Gourmet to introduce more products, tailored to the local tastebuds,” MIDF Research stated in a report on Nestlé yesterday. 

The fast-moving consumer goods concern shared the addition of a new “Nuggets” category under the Harvest Gourmet brand this year to increase plant-based food options. 

Besides Harvest Gourmet, Nestlé also provides plant-based products from across its portfolio such as Milo and Nescafé products. 

On a global scale, Nestlé SA embarked on its plant-based mission in 2017 with the acquisition of plant-based brands, Sweet Earth and Garden Gourmet, catering to the growing demand in the US and Europe markets respectively. 

To note, in 2021, Nestlé SA recorded a +16.8% year-on-year growth in its plant-based segment. 

According to a study conducted by AT Kearney, although the plant-based market is currently dominated by the US and Europe, the Asia Pacific market is expanding at a fast rate and is forecast to hold the largest share of the global plant-based market by 2025. 

This is primarily due to existing familiarity with soy-based mock meats, fermented protein such as tofu, tempeh and rising environmental and health awareness, as well as technological advancements which will allow production of alternative meat. 

“From health perspective, we think the prevalence of lactose intolerance in Malaysia will also increase adoption of a dairy-free diet. A study conducted by lecturers from National University of Malaysia between 2015 and 2017 involving 400 children from the urban areas in Klang Valley revealed that only 12.3% of children were lactose tolerant. 

“As such, we think this would bode well for the potential of the current dairy-free beverages under 

Nestlé and also spur the innovation for more dairy-free products such as ice-cream, yoghurt and other confectionery,” MIDF Research noted. 

It added while imported plant-based brands target the premium grocers, Nestlé’s move to supply the products through e-commerce to reach a wider group of consumers who have grown to be familiar with online shopping is a positive step. 

MIDF Research noted the plant-based segment is a long-term play for Nestlé. 

“As the plant-based segment is still in the nascent stage, the contribution to the group’s total earnings will remain modest for the next three to five years before becoming a more significant contributor. 

“We estimate the plant-based and dairy alternatives segment will gain market share, over the years and be accretive to the group’s earnings, given the group’s track record of developing products tailored to the domestic tastebuds and relevant,” MIDF Research opined. 

It has revised earnings estimates downwards for Nestlé to account for the rising cost of raw materials which would continue to affect profit margins, moving forward. 

“We downgrade to ‘Sell’ with a lower target price of RM116.35 (previously RM141.50). We estimate the group to record moderate earnings for financial year 2021 forecast (FY21F) to FY23F, with an estimated three-year compound annual growth rate of 3%. The group is currently trading around 53 times 12-month forward price-earnings (PE), which is considerably higher than its five-year mean PE of 42 times,” MIDF Research noted.