Investment Highlights

• We maintain UNDERWEIGHT on Nestle (Malaysia) with a slightly higher fair value of RM117/share (vs. RM110.71/share previously). Our fair value of RM117/share is based on a DCF valuation with a WACC of 4.7% and terminal growth rate of 2%, as we roll over our valuation base year to FY21F. Nevertheless, we are keeping our UNDERWEIGHT call as we believe that Nestle is fully valued. The group is currently trading at a demanding FY21F PER of 46x.

• We like Nestle for its established presence and marketleading brand in Malaysia in the FMCG space and its continued efforts to streamline its operations which should translate into improved margins.

• Nestle’s FY20 core net profit is RM553mil (-15.1% YoY) after adjusting for net foreign exchange loss during the year of RM0.5mil. The group’s results were in line with consensus estimates but below ours, accounting for 98% and 90% of forecasts respectively.

• The discrepancy was due to the Covid-19 impact on sales from its out-of-home (OOH) channels and expenses of RM62mil related to pandemic relief efforts to ensure operational continuity and preserve employee safety. Also, recall that there was a RM21mil one-off gain from its factory divestment in Petaling Jaya in FY19. We trim our FY21F and FY22F earnings forecasts by 2% and 4% respectively to account for weaker sales and introduce FY23F forecasts.

• Nestle’s 4QFY20 revenue of RM1,370mil rose by 3.1% YoY. The increase in sales was driven by continued strong inhome consumption resulting from various movement control orders of different intensities in different areas. Nestle’s core food and beverage business grew by 6% YoY in 4QFY20. The OOH channels also trended better in 2HFY20 as restrictions eased under the RMCO. Lastly, the export business also registered improvements in 4QFY20 as international borders reopened. Historically, Nestle’s exports made up 20–25% of total revenue.

• Domestic sales growth in 4QFY20 was supported by the roll-out of new products (MILO Nutri Breakfast, KIT KAT GOLD, NESCAFE Classic Kopi Kedah) and year-end festive periods. Nestle’s 4QFY20 EBIT was down 3% QoQ to RM175mil due to the cyclical increase in marketing and promotional campaigns during the period in the lead-up to the Chinese New Year festivities.

• In FY20, Nestle spent RM280mil on capex. Out of this, approximately RM150mil was for the group’s new plant-based meal solutions (PBMS) manufacturing facility in Shah Alam, which Nestle believes will be its next growth driver.

• Looking ahead, we see the uptrend in the prices of many key commodities continuing into 1HFY21 (see Exhibits 2 & 3). We believe this will negatively affect Nestle’s margins in FY21F. On a positive note, the squeeze in margins may be cushioned by Nestle’s policy of hedging of its raw materials by six months.

• Also as the MCO was reimplemented in January 2021, we believe that sales in the hotels, restaurants, caterers (HORECA) segment and OOH channels would still be below pre-Covid19 levels. However, any decline in sales would not be as sharp as the first iteration of the MCO in 2QFY20 due to strong in-home consumption that has seen positive growth during the pandemic.

Source: AmInvest Research - 24 Feb 2021