Investment Highlights

• We maintain our UNDERWEIGHT call on Nestle (Malaysia) and retain our fair value (FV) of RM115.00/share, 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.

• We believe that Nestle’s earnings may be affected by rising currency, freight and food commodity costs going forward.

• Although the group has invested in expanding the capacity of its Batu Tiga factory as well as tap into the lucrative plantbased foods market, we believe that these long-term objectives would not be sufficient to provide any significant positive share price rerating opportunities in the long run.

• Nestle’s 1HFY21 core net profit came in within expectations at RM309.7mil, accounting for 51% and 50% of our and consensus expectations respectively.

• A first interim dividend of 70 sen has been declared for 1HFY21. We forecast a dividend yield of 1.9% for FY21E.

• Revenue fell by 5% QoQ but rose 13% YoY to RM1,379.8mil in 2QFY21 due to weaker out-of-home contributions, coupled with tighter pandemic restrictions.

• The fall in revenue in 2QFY21 can also be attributed to the lower F&B segment contribution, as hotel, restaurant and café demand softened. We are confident of an improvement in 4QFY21, though it is unlikely to reach pre-pandemic figures. Nestle’s “Other” category continued to underperform in 2QFY21 due to weak demand for catering services.

• EBITDA margin fell by 2.1ppt QoQ to 13.4% in 2QFY21 dragged by weaker revenue, higher commodity costs and Covid-19 related expenses. Higher sugar, milk powder, coffee bean and wheat prices dragged down gross profit (GP) margins to 35% in 2QFY21. Prior to the pandemic, GP margins hovered between 37% and 39%.

Source: AmInvest Research - 25 Aug 2021