Investment Highlights

• We maintain HOLD on Nestle (Malaysia) with the same DCF-derived fair value (FV) of RM132/share, which implies a P/E of 42x – close to its 7-year average. Our FV also includes a 3% ESG premium.

• Considering that high raw material prices, exacerbated by the Russia-Ukraine war, are unlikely to revisit pre-pandemic level, we deem 1QFY23 earnings of RM197mil were within our/consensus estimates at 27%/28%, albeit 1Q accounted for 31%-36% of FY17-FY19 (pre-pandemic) net profit due to seasonality. As such, we make no changes to our FY23F-FY25F earnings.

• The group did not declare any dividend for the quarter under review, as expected.

• YoY, 1QFY23 earnings dropped 4% to RM197mil despite revenue increasing by 9%, mainly due to higher commodity prices and unfavourable exchange rates. The higher revenue was supported by a 9% YoY growth in its core food & beverages (F&B) segment, driven by better sales in domestic (+10% YoY) and export (+4% YoY) markets. Meanwhile, non-F&B segment grew 6% YoY.

• QoQ, 1QFY23 bottom line surged 48% on the back of higher topline (+12%), buoyed by Chinese New Year festivity coupled with lower operating expenses (-8%). Segmental wise, its F&B division grew 13% QoQ while non-F&B improved 6% QoQ.

• We believe food inflation remains Nestle’s biggest headwind in the near-to-medium term. Exhibit 2-5 show that some major commodity prices remain elevated above pre-pandemic level despite slightly moderating recently. Also, sugar prices continue to trend higher.

• Management holds the view that food commodity prices and inflation could remain elevated throughout 1H2023 but is optimistic for a progressive moderation for the rest of the year.

• On a brighter note, we opine that a deeper correction in commodity prices, alongside the group’s continuous cost saving initiatives could provide a better margin outlook moving forward. Separately, we think that an ongoing innovative new product pipeline could sustain its topline growth.

• Even so, at a FY23F P/E of 42x currently, the stock is trading near its historical 7-year mean of 44x, which we deem fairly valued given the current unfavorable operating environment. The stock also offers a mild dividend yield of 2%.

Source: AmInvest Research - 26 Apr 2023