Investment Highlights

• We maintain HOLD on Nestle (Malaysia) with an unchanged DCF-derived fair value (FV) of RM132/share, which implies an FY23F P/E of 42x – close to its 7-year average. Our FV also includes a 3% ESG premium.

• Our forecasts are maintained following an analyst briefing yesterday. Key takeaways include:
  • According to Nestle, consumer sentiment remains positive, and the group is cautiously optimistic that sales momentum is likely to carry on in upcoming quarters. With several state polls expected to be held within the year, election goodies from state governments could possibly spur consumer spending.
  • To recap, Nestle posted domestic sales of RM1,480mil (+10% YoY) and export revenue of RM362mil (+4% YoY) in 1QFY23, supporting a 9% YoY growth in the topline of RM1,842mil.
  • Despite seasonality in the past where sales tend to come off post-Chinese New Year (CNY), we expect performance in 2QFY23 to be encouraging on the back of Hari Raya festivities.
  • In terms of price adjustments, Nestle has adjusted its prices since last year. There were also some adjustments in March 2023 (average 5%), but further price hike is unlikely, given that food commodity prices have softened slightly.
  • Operationally, RM1bil of capex is earmarked for FY23F-FY25F, largely in line with its FY22 spending. We believe the capex will be used to upgrade manufacturing facilities and expand production capacity for the improvement of operational efficiency.
  • Going forward, new product launches will continue to fuel Nestle’s topline growth. For instance, its KITKAT Pink Ice Cream has received an overwhelming response. Meanwhile, given the volatility in raw material prices, on-going cost efficiency measures could at least help to sustain its margin at the current level, in our view.
• The stock is currently trading at FY23F P/E of 42x versus its 7-year mean of 44x, which we deem fairly valued given the current adverse operating environment. The stock also offers a thin dividend yield of 2%.

Source: AmInvest Research - 28 Apr 2023