Investment Highlights

• We maintain HOLD on Nestle (Malaysia) with an unchanged DCF-derived fair value (FV) of RM129/share, which implies a FY24F P/E of 45x – close to its 5-year historical average. Our FV also includes a 3% ESG premium based on a 4-star rating.

• Nestle’s 1QFY24 earnings of RM196mil came within expectations, reflecting 30% of our and 25% of consensus. Hence, we made no changes to FY24F-FY26F earnings.

• YoY, 1QFY24 revenue dropped by 3% mainly due to decline in domestic sales (-3.9% YoY) amid weaker consumer sentiments and cautious spending patterns. Its net profit only declined marginally by 1%, partially aided by better cost management initiatives and lower average raw material cost such as wheat, milk solids and palm oil.

• QoQ, 1QFY24 revenue increased by 6%, driven by higher sales on festive season. Its net profit rose by 32% QoQ to RM196mil thanks to better operational efficiency as EBITDA margin improved by 3.5%-points to 18.3%.

• Nestle announced plans to increase the average selling price of certain products from 1 July 2024 onwards due to a surge in certain raw material costs and inflationary pressures. The increase in price aims to protect its margins.

• We are cautious on the likelihood that some consumers could opt for alternative products amid a soft consumer spending sentiment and recent increase in sales and service tax, especially among the B40 demographic.

• Major commodity prices remain above pre-pandemic levels , even though food has softened. Cocoa and coffee are still trending upwards, which could lead to margin compression on certain products. We expect commodity prices to continue to be elevated albeit at a narrow range of fluctuation, except cocoa and coffee.

• On a brighter note, Nestle is committed to innovation and has a pipeline of new products such as plant-based meals and confectionery as well as ice cream products that are expected to sustain revenue growth and attract new customers.

• The stock is currently trading at FY24F P/E of 44x versus its 5-year mean of 43x, which we deem as fairly valued given the current elevated cost environment. It also offers a thin dividend yield of 2.5%.

Source: AmInvest Research - 30 Apr 2024