HLBank Research Highlights

Author: HLInvest   |   Latest post: Fri, 18 Sep 2020, 10:36 AM


Nestle - External Headwinds Incoming

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We attended Nestle’s 2Q19 results briefing and came away feeling neutral on the group’s prospects going forward. As the meeting yielded no surprises, we maintain our forecasts. We maintain our SELL call and TP of RM111.00 based on an unchanged DDM valuation methodology (r: 6.8%, TG: 3.5%).

We attended Nestle’s 2Q19 results briefing and came away feeling neutral on the group’s prospects going forward.

Introduction of new products expected to spur growth. Nestle will continue to introduce new product offerings to refresh their portfolio, which we expect to make up >10% of total sales. In 2Q19, new products by Nestle included Nescafe Gold Jar relaunch, Maggi Pedas Giler 2X Ayam Bakar, Maggi Pedas Giler Seafood, La Cremia Summer Berries Yoghurt Ice Cream and Kit Kat Popcorn flavour. We are particularly positive on the launch of new products recently such as Milo Protein Up and Starbucks branded coffee products which have been well received by consumers so far. Nestle plan to leverage their global alliance with Starbucks by selling the latter’s branded in-home coffee products which includes ground coffee beans and coffee pods (figure 1). Note that Nestle Malaysia is the first country in South East Asia to introduce Starbucks branded coffee. We are positive on the introduction of premium offerings as we understand that they command better margins than core products.

Slightly higher raw material cost expected in FY19 (vs. FY18). Nestle guided that while they have locked in the commodity costs for the remainder of FY19, they expect to incur slightly higher raw material prices in this year. Lower coffee and palm oil prices are expected to be more than offset by other rising key commodity prices such as barley and wheat. Nestle shared that the reason for the higher barley and wheat prices are due to draught in Australia, which has reduced availability of these commodities.

Lower export sales to prevail in 3Q19. Export sales declined 7.2% in 1H19 (vs. 1H18) which has prevailed into July and August. Note that in total, Nestle exports to approximately 50 countries given its reputation as a producer of halal certified products and Malaysia’s proximity to other ASEAN neighbours. Historically, export sales make up approximately 20% of the group’s total sales.

Outlook. We expect the introduction of new innovative product offerings like Milo Protein Up and Starbucks coffee to ignite consumer interest. Despite this, larger macro factors such as steeper raw material costs and tepid export sales are expected to be a boon for the group. Despite higher commodity costs, Nestle continues to view price increase as an act of last resort. Instead, we expect the group to grow profitability by finding operational cost synergies in production and logistics.

Forecast. As the meeting yielded no surprises, we maintain our forecasts.

We maintain our SELL call and unchanged TP of RM111.00 based on the DDM valuation methodology (r: 6.8%, TG: 3.5%). While we are confident that Nestle will continue to strengthen its group’s portfolio of products, external headwinds mentioned above do not augur well for the group. Furthermore, we reckon the share price has risen beyond justifiable levels. At current price, Nestle is trading at 46.3x FY19 P/E and yielding an unattractive 2.2%. In comparison, its holding-co in Switzerland trades at a cheaper 24.7x FY19 P/E while its sister-co in Nigeria trades at 19.1x FY19 P/E.


Source: Hong Leong Investment Bank Research - 29 Aug 2019

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