Investment Highlights

• We maintain UNDERWEIGHT on Nestle (Malaysia) with an unchanged fair value of RM117.00/share. Our fair value of RM117.00/share is based on a DCF valuation with a WACC of 4.7% and terminal growth rate of 2%.

• The key highlights from Nestle’s briefing are as follows:

1. The lower FY20 revenue was due to weaker local sales but this was slightly cushioned by the improvement in export sales;
2. In October 2020, Nestle carried out Covid-19 masstesting on its workers as the 3rd wave of the pandemic hit. We believe that the testing will continue into 1HFY21 and increase Covid-19- related expenses;
3. Nestle’s new plant-based meal solutions manufacturing facility is up and running and is currently supplying to out-of-home (OOH) customers; and
4. Sales from online channels/e-commerce continued to grow especially during FY20. Due to lockdown measures in FY20, Nestle is seeing a shift in consumer patterns.

• Although revenue decreased by 1.9% from RM5,518mil in FY19 to RM5,412mil in FY20, export sales saw a slight increase of 1.6%, contributing about RM1,097mil. The improvement in export sales however was negated by weak domestic revenue, which dropped 2.8% to RM4,315mil in FY20.

• Nestle started Covid-19 testing on its staff from October 2020 onwards. The group has conducted around 140,000 antigen tests so far. At an average cost of RM75 per test, this came to around to RM10.5mil just for testing alone.

• We understand that Covid-19 testing will still be ongoing in 1HFY21 but at a lower frequency, in line with the reduced number of cases in Malaysia. The cost of Covid-19 testing may exert downward pressure on operating profit margins in FY21F.

Source: AmInvest Research - 25 Feb 2021