• We maintain UNDERWEIGHT on Nestle (Malaysia) with a lower fair value of RM110.71/share (vs. RM115.86/share previously). Our fair value of RM110.71/share is based on a DCF valuation with a WACC of 4.7%.
• Nestle’s 9MFY20 core net profit fell 19.4% to RM420.2mil as compared to the same period last year. The group’s 9MFY20 core net profit of RM420.2mil accounted for 67.7% and 66.5% of our and consensus full-year earnings forecasts. We deem this as below expectations. Sales from the out-of-home sectors like HORECA and mobilitydependent channels such as R&R stops and office-related crowd were hit by Covid-19 in 2QFY20.

• As such, we trim our FY20E, FY21F and FY22F earnings forecasts for Nestle by 8.4%, 6.1% and 7.7% respectively to account for the lower-than-expected turnover.

• Nestle’s 9MFY20 revenue was lower by 3.5% YoY as sales in HORECA (hotel, restaurant and café) channels declined during the first half of the year during the movement control order (MCO).

• However, this was partially offset by the group’s core F&B business, which registered an increase of 1.1% in sales. The higher sales were underpinned by solid sales execution and successful marketing campaigns such as the Nestle Salary for Life contest.

• Nestle’s 9MFY20 core EBITDA slid 14.6% YoY to RM736.8mil while core EBITDA margin dropped 2.36ppt to 18.2%. This is due to slightly higher operating expenses while commodity prices were mixed (sugar +1%; skimmed milk powder +6%; Arabica +4%; cocoa +6.4%, barley -22.5%; wheat -7%).

• Comparing 3QFY20 against 2QFY20, Nestle’s top line climbed 13.9% to RM1,388.4mil mainly due to the strong improvement in both the in-home and out-of-home channels. This was expected as the period coincided with the RMCO (started mid-June), with the progressive easing of restrictions resulting in pent-up consumer demand and a general increase in consumer sentiment. The quarter also saw a 2.2% growth in in-home consumption and a positive recovery of exports.

• Nestle’s core net profit increased by 22% QoQ to RM128.4mil but decreased 14% YoY in 3QFY20. The QoQ improvement in core net profit in 3QFY20 came on the back of a recovery in sales and lower Covid-19 related expenses. Recall that Nestle spent RM50mil in 2QFY20, to preserve work safety and ensure operational continuity in its factories.

• 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 47x, which is at a premium to its 5-year historical forward PE of 36x.

Source: AmInvest Research - 11 Nov 2020