Investment Highlights

• We maintain our UNDERWEIGHT call on Nestle (Malaysia) (Nestle) with a revised fair value (FV) of RM114/share (from RM115/share), based on a DCF valuation with an unchanged WACC of 4.7% and terminal growth rate of 2.0%. We tweak 2022F and 2023F earnings lower by 15% and 10% respectively. There is no adjustment to our FV for ESG based on our 3-star rating.

• Below expectations. Nestle’s 4Q21 core net profit disappointed at RM112.1mil (-24% QoQ, -19% YoY), accumulating 2021 earnings to RM569.8mil (+3% YoY). This accounted for 94% of both our and consensus’ estimates. The impact of high raw materials price is worse than expected as its gross profit margin declined 3.0 ppts compared to the previous quarter.

• Dividend. An interim dividend of 102 sen was declared. This brought total dividends declared for 2021 financial year to 242 sen at a 100% payout ratio.

• Out-of-home sales improved but still below pre-pandemic level. The group’s revenue improved to RM1,466.5mil (+2% QoQ, +7% YoY) in 4Q21. YoY growth was mainly driven by the F&B segment with both domestic and export sales reporting positive growth. The sequentially stronger sales were driven by the non-F&B segment which benefited from the reopening of the economy. Contribution from out-of-home channels continues to rise but has yet to reach the pre-pandemic level.

• Inflationary pressures eating into margin. Despite the stronger sales, Nestle’s EBITDA declined 21% QoQ and 7% YoY in 4Q21 due to margin compression. The group’s EBITDA margin was affected by the higher commodity prices and Covid-19 related expenses. Higher sugar, milk powder, coffee bean and wheat prices dragged down gross profit margin to 31.5% in 4Q21 compared to 37%–39% prior to the pandemic.
  Moving forward, we believe high raw material and freight costs will continue to exert downward pressure on Nestle’s profitability, capping its earnings recovery potential. The easing of the input costs will likely be in phases rather than immediately as global supply chains readjust.

• Earnings revision. We cut 2022F and 2023F earnings by 15% and 10% respectively after imputing more conservative sales and gross profit margin assumptions.

Source: AmInvest Research - 23 Feb 2022