Investment Highlights

• We maintain HOLD on Nestle (Malaysia) with an unchanged DCF-derived fair value (FV) of RM119/share. This implies a FY23F PE of 38x – 0.5 standard deviation below its 7-year average of 41x. No changes to our neutral 3-star ESG rating.

• FY22 earnings of RM620mil were largely within expectations, coming in 3% above our and 4% lower than consensus estimates. We made no changes to our FY23FFY24F earnings and introduce FY25F net profit at RM925mil premised on an improving revenue growth of 4%.

• FY22 earnings increased by 9% YoY on the back of a 16% improvement in revenue, mainly driven by better performance of its core food & beverage (F&B) segment (+15% YoY). Notably, strong sales from domestic (+13% YoY) and export markets (+30% YoY) have partially mitigated the impact of higher commodity prices, unfavourable exchange rates as well as the Prosperity Tax.

• Notwithstanding the robust FY22 sales, the impact of high input costs was apparent with the decline in gross (-3.2%- point YoY) and net (-0.6%-point YoY) margins.

• QoQ, 4QFY22 earnings surged 18% despite revenue dropping slightly by 2%, supported by cost saving initiatives. As a result, net margin was up by 1.4%-point sequentially.

• YoY, 4QFY22 revenue climbed 12%, bolstered by robust performance from the F&B division (+13%). The strong performance was also evident in increased domestic (+11% YoY) and export (+18% YoY) sales. Consequently, 4QFY22 earnings rose 19% YoY.

• The group declared a total dividend of 262 sen per share for FY22, exceeding our forecast of 250 sen per share, translating to a yield of 2%. We estimate a FY23F dividend of 305 sen per share, translating to a pedestrian yield of close to 3%.

• Moving forward, food inflation remains Nestle’s biggest concern, which we think will continue to limit its earnings visibility due to high raw material prices. We opine that better margins posted QoQ might be initiated by better costcontrol, as some of the major commodity prices (Exhibit 2 – 5) remain elevated as compared to historical levels despite having shown some moderation.

• At 43x FY23F PE, the stock is trading above its historical 7- year mean of 41x, which we deem unjustified given the unfavorable operating environment. FY23F dividend yield is also unattractive at 2.6%.

Source: AmInvest Research - 22 Feb 2023