Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Nestle (Malaysia) with an unchanged fair value of RM115.86 based on DCF valuation with a discount rate equivalent to WACC of 4.7%.

• Nestle’s 1HFY20 core net profit of RM291.8mil came in at 43.1% of our and 44.9% of street’s earnings estimates. We deem this as in line with expectations as we believe 2H will be stronger as Malaysia has entered the recovery movement control order (RMCO) starting in June 2020.

• Nestle’s 1HFY20 revenue slipped 4.8% YoY due to the Covid-19 impact following the dip in dining-out frequency and restrictions on HORECA (hotel, restaurant and café) channels during the MCO and CMCO in April–9 June 2020. Mobility was also impeded during this time which impacted sales in R&R stops and office-related channels.

• However, demand was partly buoyed by improved in-home consumption as household penetration improves for brands like Maggi, Nescafe, Milo and Nestle Ice Cream.

• The group had successfully executed the Nestle Salary For Life contest which pulled in 1.3mil entries, generating solid sales during MCO.

• The group noted that the situation in HORECA channels has progressively improved since the RMCO.

• Nestle’s 1HFY20 core EBITDA slid 18% to RM504mil while core EBITDA margin dropped 3 ppts to 19%. Commodity costs were mixed (sugar -1%; wheat -5%; barley -19%; arabica +6%; and cocoa +8%).

• Nestle also incurred higher expenses in relation to the Covid-19 pandemic (roughly RM50mil, mostly in 2QFY20). These expenses were necessary to ensure work safety, support to frontliners and ensure continuity across the value chain. The group also allocated funds for relief efforts to medical frontliners. These include a partnership with the Malaysian Red Crescent Society.

• Moving forward, we believe Nestle’s earnings performance will be stronger in 2HFY20 as restrictions on HORECA ease and visitors patronage at restaurants, R&R stops, and hotels improve.

• We like Nestle for its established presence, position as the market leader in the FMCG space, and efforts to streamline its operations, which should translate into improved operating profit margin. However, the group’s valuations are rich at FY21F PE of 44x, which is at a premium to its 5-year historical forward PE of 36x.

Source: AmInvest Research - 26 Aug 2020