Investment Highlights

• We maintain UNDERWEIGHT 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%.
• 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.
• The key highlights from Nestle’s briefing are as follows:

1. Revenue was largely dragged by domestic sales.

2. Nestle commits to spend RM280mil on capacity expansions in 2020.

3. Higher costs in 1H20 due to Covid-19-related expenses.

4. E-commerce segment continues to grow.

• Domestic sales dropped 6% YoY to RM2,142mil while export sales held its ground, slipping only by 0.3% to RM512mil despite limitations with logistics.
• Local sales were affected by 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, which impacted sales in R&R stops and office-related channels.
• The group will spend RM280mil in FY20F for expansions. A significant portion will be used to build the first plant-based meat factory in Malaysia. The manufacturing plant will be located in Shah Alam. This plant is expected to be completed by 1H2021.
• Another portion of the capex will be spent on redevelopment and upgrading works on Nestle’s Batu Tiga factory. This is the manufacturing plant for its Maggi products. The group expects this expansion plan to cater to the demand growth for the next 10 years.
• Nestle incurred higher expenses in relation to the Covid- 19 pandemic (roughly RM50mil, mostly in 2QFY20). A big portion of the Covid-19 related expense is on the allowance for frontline workers.
• Additionally, the group also incurred higher freight cost as Nestle acquired additional raw material at the start of the MCO in order to ensure smooth running of its manufacturing factory. Moving forward, we think that the Covid-19 related expense will be smaller in 2HFY20F
• Nestle saw a spike in online sales during the MCO and its growth have been slow and steady since then. Nestle now offers delivery service for Nestle Ice Cream. Nestle has also introduced several new products in 2QFY20 like the Nescafe Omega Plus Dark Chocolate and a new Maggi Goreng range.

Source: AmInvest Research - 27 Aug 2020