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.
1HFY23 earnings of RM378mil came within our expectations at 52% of our full year forecast and 53% of consensus. Hence, we made no changes to FY23F-FY25F earnings.
Also, the group declare dividend of RM0.70 for the quarter, as expected.
YoY, 1HFY23 revenue improved by 7.8%, driven by stronger domestic sales, likely boosted by increased spending during festivities and improved economic activities. However, 1H2023 net profit only saw a modest increase of 0.9% due to unabated cost pressure, which caused EBITDA margin to drop 0.8-points% to 17.4%.
QoQ, 2QFY23 net profit declined by 8.2% to RM181mil in tandem with revenue decreasing by 5%, exacerbated by elevated cost pressures stemming from commodity prices and marketing expenses for new product launches and festive celebrations.
Despite these challenges, we continue to identify food inflation as Nestle’s biggest obstacle in the near-to-medium term. Major commodity prices remain elevated above pre-pandemic levels (Exhibit 2-5), even though food commodity prices have softened slightly. Coffee prices have risen by 24% since end-March 2023 while sugar increased 20%. However, crude palm oil has decreased by 16% and wheat by 7% over the same period.
On the brighter note, Nestle is committed to innovation and has a pipeline of new products that are expected to sustain revenue growth and attract customers. Notably, in 2QFY22, Nestle introduced new flavors for MAGGI noodles, plant-based Fish-Free Fingers and new beverage items; all of which were well-received by customers with a positive response.
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 elevated cost environment. The stock also offers a thin dividend yield of 2%.
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