Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Nestle (Malaysia) with a lower FV of RM115 (RM118 previously) based on DCF valuation with discount rate equivalent to WACC of 4.7%. We trim our FY20F, FY21F and FY22F earnings forecasts by around 7-8% each to account for additional expenses in relation the movement control Order (MCO) following the Covid-19 pandemic.

• Nestle’s 1QFY20 core net profit came in at 25.5-26.6% of our full-year forecast and full-year consensus estimates respectively. However, we consider the results below expectations as 1Q is typically the strongest quarter for Nestle, making up around 36% of its full-year earnings for the past 3 years. The variance against our forecast came largely from additional expenses incurred in relation to the Covid-19 pandemic which resulted in a lower net margin.

• Nestle’s 1QFY20 revenue slipped 1.3% YoY due to lower domestic sales (-3.4% YoY) although largely offset by recovery in exports sales (+8.8%). Lower domestic sales was attributed to the Covid-19 pandemic impact following the dip in dining-out frequency and closure of restaurants during MCO beginning mid-March 2020.

• However it was slightly buoyed by improved in-home consumption, the successful introduction of new products (i.e. KIT KAT Ice Cream) as well as effective marketing campaigns (i.e. Nestle Salary for Life Contest).

• Nestle’s 1QFY20 EBITDA slid 18.4% YoY while EBITDA margin dropped 4.5ppts YoY to 21.3%. This was partly due to higher commodity costs. (Sugar +8%; Skimmed milk powder +24%; Arabica +8%; Cocoa +18%).

• Nestle also incurred higher expenses in relation to the Covid-19 pandemic. We believe the additional expenses included evacuation, full disinfection and complete sanitization of the work site where one of its employees tested positive for Covid-19 in March 2020.

• Nestle also incurred expenses for employees’ personal protective equipment, additional safety protocol across its sites as well as temporary allowances provided to employees working in factories, distribution centres and sales during the MCO. The group also allocated funds for relief efforts to medical front liners including a partnership with the Malaysian Red Crescent Society.

Source: AmInvest Research - 6 May 2020