Investment Highlights

• We maintain HOLD on Nestle (Malaysia) with a higher DCFderived fair value (FV) of RM132/share from RM119/share previously by removing the discount of 0.5 standard deviation from its 7-year average of 41x. No changes to our neutral 3-star ESG rating.

• We maintain our FY23F – FY25F earnings as the proposed acquisition of a nutritional product player, Wyeth Nutrition (Malaysia) (Wyeth Malaysia) will have a negligible positive impact.

• Nestle entered into a deal yesterday to purchase Wyeth Malaysia from Wyeth (Hong Kong) Holding Company Limited for a cash consideration of RM165mil. This is deemed a related party transaction due to Wyeth HK being wholly-owned by Nestle SA.

• Despite the minimal earnings impact, based on Wyeth Malaysia’s FY22 net profit of RM17mil, the acquisition PE of 9.7x is a bargain vs. the average 16x of small-cap F&B players.

• Established on 29 January 1993, Wyeth Malaysia mainly engages in trading and dealing of nutritional products with brands included S-26, S-26 GOLD, ASCENDA, PROMAMA and ENERCAL PLUS, which are mostly milk-based. Financial-wise, the company posted a tremendous 3-year FY19-FY22 CAGR of nearly 149% for earnings and 14% for revenue. It does not have any borrowings as at end-FY22.

• Assuming an annual growth rate of 5% in the post-acquisition contribution from Wyeth Malaysia, the deal is marginally earnings accretive for FY23F – FY25F bottomline, after accounting for one-off RM1mil acquisition expenses. As the acquisition will be funded via internal funds, we estimate FY23F net gearing to rise to 151% from 126%.

• These are some key takeaways from an analyst briefing yesterday:
  • The sequential margin improvement in 4QFY22 was driven by cost efficiencies and price adjustments. Depending on the movement of food commodity prices, the group does not rule out the possibility of further price adjustment if necessary. If there is any, the price adjustment will not be a broad-based hike but targeted by category.
  • The group has also earmarked a capital expenditure of RM1bil over the next 3 years, in line with its continuous efforts to introduce innovative products such as Maggi Nutri-licious noodles, Maggi margination recipes and Nescafe Gold Cappuccino Ice Cream.
  • All in, management remains committed to look for more top and bottomline growth avenues to mediate the current challenging operating environment by introducing more innovative products. This includes positioning to benefit from growing health awareness and demand for plant-based products as well as better cost-control to maintain margins.
  • However, management also expects food commodity prices and inflation to remain high throughout 1H2023, with a progressive moderation in 2H2023. This is also in line with our view that food commodity prices could remain elevated comparing to historical levels. While moderation was seen, a deeper correction could provide a better margin outlook moving forward, in our view.
• At 43x FY23F PE, the stock is trading near its historical 7-year mean of 41x, which we deem fairly valued given the current unfavorable operating environment with a mild dividend yield of 2.4%.

Source: AmInvest Research - 23 Feb 2023