Investment Highlights

• We maintain HOLD on Nestle (Malaysia) with a lower DCFderived fair value (FV) of RM129/share (from RM132/share), which implies a FY24F P/E of 40x – close to its 5-year historical average. Our FV also includes a 3% ESG premium based on a 4-star rating.

• 9MFY23 earnings of RM512mil accounted for 70% of our full year estimate and 72% of consensus forecast. However, we deem the earnings to be below expectations as we now expect a lower 4Q23 net profit than our earlier estimate due to an increase in operating expenses (OPEX). Hence, we cut our FY23F-FY25F earnings by 6-12% to factor in higher OPEX and pressure on input cost from ongoing volatility in commodity prices as well as currency weakness.

• The group declared a dividend of RM0.70/share for the quarter, as expected. This led to a YTD dividend of RM1.40/share (payout: 50%)

• YoY, 9MFY23 net profit improved by 5% to RM512mil in tandem with revenue increase of 7%, driven by stronger domestic sales and better operational efficiency with an improved EBITDA by 250bps to 15%.

• QoQ, 3QFY23 revenue growth was subdued with sustained domestic demand offset by weaker export sales. However, 3QFY23 net profit declined by 26% QoQ to RM134mil due to elevated cost pressures stemming from volatile commodity prices and higher OPEX.

• Despite these challenges, we continue to identify food inflation as Nestle’s biggest obstacle in the near-to-medium term. Major commodity prices remain above prepandemic levels (Exhibit 2-7), even though food commodity prices have softened slightly. Cocoa and sugar prices are still trending upwards which could cause margin compression on certain products. We expect commodity prices to continue to be elevated albeit at a narrow range of fluctuation.

• On a 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 3QFY23, Nestle introduced new flavors for ice cream, dairy free drinks and new food items; all of which were well-received by customers with positive response.

• The stock is currently trading at FY24F P/E of 39x versus its 5-year mean of 43x, which we deem as fairly valued given the current elevated cost environment. It also offers a thin dividend yield of 2.5%.

Source: AmInvest Research - 27 Oct 2023