Parsing the impact of commodity price patterns on consumer firms

KUALA LUMPUR: A growing correlation between commodities prices and their influence on input cost for consumer staple firms will have a significant impact on profit margin projections, says Kenanga Research as it shared the findings of a recent correlation study.

The research firm noted some key observations from the study, which suggested an intensifying correlation between the prices of staple grains such as wheat, corn and soybean over the last five years, and a similar growing relationship between cotton, aluminium and crude palm oil.

WTI crude oil has also shown an increasingly strong correlation with a range of commodities, including soybean, cotton, corn, coffee, and aluminium, it said in a recent thematic report on the consumer sector.

While rising input costs typically indicate challenges for margins, there are “intricate dynamics” at play that often present a more complex picture.

The correlation study found distinct patterns in gross profit margin sensitivities across Dutch Lady Milk Industries Bhd, Nestle Malaysia Bhd, Fraser & Neave Holdings Bhd and Power Root Bhd, the research firm revealed.

It reported that Dutch Lady’s and Nestle’s gross profit margins are most influenced by sugar, corn, crude oil, coffee and soybean prices, with a nine-month lag effect.

F&N’s gross profit margin, conversely, shows a three-month lag correlation with sugar, aluminium, the Baltic dry index, and crude palm oil.

Power Root’s gross profit margin is immediately impacted by fluctuations in sugar, coffee, aluminium, and the Baltic dry index.

“In summary, the prevailing commodity price environment corroborates our gross profit margin projections, with Dutch Lady and Nestle likely to oscillate within a narrow range due to mixed commodities price trends.

“F&N, on the other hand, could see a short-term margin uplift in 3Q23, although this could be neutralised by subsequent commodity price hikes.

“As for Power Root, despite immediate cost pressure, the company’s robust brand and pricing leverage should help it weather these challenges,” it said.

In light of the findings of the study and the latest trends in commodity prices, Kenanga revisited its initial gross profit margin assumptions for Dutch Lady, Nestle, F&N and Power Root.

Subsequently, Kenanga adopted a more conservative stance on Dutch Lady and Nestle, reducing the gross profit margin for both companies by 0.5%.

“This leads to updated gross profit margin projections of 28.8% and 29% for Dutch Lady’s FY23-24F numbers, and 31.2% and 31% for Nestle’s FY23-24F numbers.

“These adjustments result in lowered net profit forecasts for Dutch Lady and Nestle by up to 1.7% and 1.5%, respectively,” it said.

Post-review, Kenanga retained its “outperform” rating on Dutch Lady with a slightly reduced target price of RM26.60 from RM27 previously, and kept Nestle’s “underperform” rating with an unchanged target price of RM115.

Meanwhile, the research firm’s forecasts and ratings for F&N, Power Root, Aeon Co (M) Bhd, MR DIY Group (M) Bhd, Padini Holdings Bhd and QL Resources Bhd remained unchanged.