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.

• 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%.

Source: AmInvest Research - 28 Jul 2023