Investment Highlights

• We maintain our HOLD call on Nestle (Malaysia) with an unchanged fair value (FV) of RM134.00/share. We use a DCF valuation with a terminal growth rate of 2.5%. There is no ESG-related price adjustment for our rating of 3 stars.

• We note the lack of short-term rerating catalysts. Nonetheless, Nestle’s new plant-based meals solution (PBMS) segment and its capacity expansion of its Batu Tiga factory should support long-term growth.

• We are positive on Nestle’s efforts to streamline its factory operations and reduce costs. However, Covid-19 testing efforts, unfavourable commodity market movements and freight costs are likely to offset margin improvements, at least in the near term.

• Here are some highlights of the results briefing:
   

Earnings and earnings pressure.

• We are optimistic that Nestle will see a recovery in its Out of Home (OOH) food segment in 2HFY21, contingent on the success of seasonal festivals and pent-up demand being a strong driver of HoReCa recovery. We believe that the Malaysian government will issue more targeted, district-focused pandemic restrictions in its effort to preserve economic activities.

• However, we believe that Nestle’s “other” category will continue to underperform, due to weak demand for its catering services this year.

• Covid-19 prevention and testing measures will be a drag on earnings for now, although they have been effective in preventing severe production disruptions. About RM22mil of Covid-19-related expenses were incurred in 1QFY21, the bulk used for the 8,000–12,000 antigen tests performed each week.

• The group intends to maintain its competitive price point. It does not intend to pass on higher COGS and operational expenses to its customers. Nestle has been hedging some of its raw materials to offset price volatility. The group has incurred higher storage costs in stocking up on these materials beforehand.

Capex

• Nestle intends to invest RM300mil on capex, the bulk of which will be used for the capacity expansion of its Batu Tiga factory. Demand for Maggi products such as instant noodles has already begun to overtake supply, bolstered by strong export sales. In 1QFY21, export turnover made up 19% of total revenue and rose by 1.2% YoY.

• We view Nestle’s efforts in digitalizing its processes positively, not merely as a means to improve margins but also to reduce reliance on workforce. Less manpower reliance is critical in minimizing the effects of Covid-19 outbreaks within the factory and lowering the number of Covid-19 testing. Additionally, Malaysia is currently experiencing a significant outflow of foreign workers, which is likely to result in manpower shortages within the year.

New products

• We are optimistic of the ability of Nestle’s PBMS segment to tap into the middle-class market. Nestle intends to make this segment affordable, enough to appeal to the local middle class, as imported variations tend to be far too expensive. This is an initiative supported by the Malaysian government, with Nestle having claimed tax incentives for the group’s new PBMS factory.

• We believe that the group’s strong brand presence compensates for restrictions on in-store tasting. It is worth noting that a number of the group’s new launches (e.g. Kit Kat Gold and Oreo ice creams) have been successful. We believe that the group’s ability to leverage its household brand names gives it a competitive edge over the rest.

• The group is currently utilizing e-commerce platforms as a gauge of customer preferences. E-commerce channels such as Lazada and Shopee currently contribute to 4% of sales. Nestle uses these channels as testing tools to see which products appeal most to customers before producing them on a large scale.

Source: AmInvest Research - 5 May 2021