Investment Highlights

• We maintain our UNDERWEIGHT call on Nestle (Malaysia) with a slightly lower fair value (FV) of RM115.00/share (vs. RM117.00/share previously). Our FV is based on a DCF valuation with an unchanged WACC of 4.7% and terminal growth rate of 2.0%. There is no adjustment to our FV for ESG based on our 3-star rating (Exhibit 8).

• We have reduced Nestle’s FY21F net profit by 12% to account for the impact of Covid-19 in 2QFY21. In the long term, we feel that Nestle’s plant-based food segment will take a fair amount of time before it is able to make notable contributions, hence we maintain our UNDERWEIGHT call for now.

• No dividend was declared during the quarter under review.

• Nestle’s 1QFY21 core net profit came in below expectations at RM175mil, accounting for 25% and 28% of ours and consensus expectations respectively. In pre pandemic periods, 1Q earnings account for almost 36% of full year earnings, largely due to the festive season and lower operating expenses within the quarter.

• Thus, we reduce our FY21F forecasts by 12%. This is to account for weaker-than-expected consumer sentiment as the resurgence in Covid-19 cases is driving down out of-home (OOH) activities and HoReCa demand.

• Additionally, we are wary of rising raw material prices and currency fluctuations. Rising sugar, milk powder coffee bean and wheat prices are likely to depress gross profit (GP) margins to 35% for the year. Prior to the pandemic, GP margins hovered between 37% and 39%.

• The USD has risen against the MYR since Jan 2021, peaking at US$1.00:RM4.1505 on 30 March 2021. About 50% of Nestle’s raw materials are denominated in USD, though this is somewhat offset by export sales that contribute almost 20% of revenue.

• FY22F’s forecasts are unchanged but we tweak FY23F’s up by 3%. We believe that the pent-up demand will provide an edge to FY23F’s earnings. With air travel not expected to recover anytime soon, we predict consumers will overcompensate by splurging more than normal. In Nestle’s case, its stands to benefit from a surge in HoReCa demand as well as more consumers purchasing high-margin “masstige” (prestige for the masses) products (e.g. Magnum ice-creams and premium coffee).

• We are positive on the long-term prospects of Nestle’s foray into alternative meats. The group has already expanded its distribution channel of its alternative meats to restaurants, retail stores and online platforms. Its new Harvest Gourmet brand has inked deals to supply to global and regional restaurant chains such as KyoChon and Carl’s Jr.

• Revenue improved by 1.0% YoY and 5.8% QoQ to RM1.4bil in 1QFY21, driven by a robust growth in Nestle’s F&B business. This was driven by robust in-home consumption and the successful introduction of new products. On a negative note, OOH sales were weak. We believe that restrictions on in store-testing may have affected sales.

• EBITDA fell by 7% YoY to RM283.6mil in 1QFY21 while EBITDA margin fell by -1.8 ppts, largely as result unfavourable movements in the commodity market and an additional RM22mil of Covid-19-related operating expenses. On a QoQ basis, EBITDA rose by 21% in 1QFY21 while EBITDA margin rose by 2.5 ppts. We are not optimistic on the outlook for EBITDA margins in the coming quarters as raw material prices are still trending upwards.

Source: AmInvest Research - 1 Jun 2021