Investment Highlights

• We maintain HOLD on Nestle (Malaysia) with an unchanged DCF-derived fair value (FV) of RM129/share, which implies a FY24F P/E of 45x – close to its 5-year historical average. Our FV also includes a 3% ESG premium based on a 4-star rating.

• We maintain FY24F-FY25F earnings as FY23 earnings of RM660mil came within our expectation, 2% below our forecast but 7% below consensus estimate. We introduce FY26F net profit with a 5% growth premised on a similar revenue expansion.

• The group declared a dividend of RM1.28/share for the quarter, as expected. This led to a YTD dividend of RM2.68/share (payout: 95%).

• YoY, FY23 net profit improved by 6% to RM660mil in tandem with a similar revenue increase, driven by stronger domestic sales, and lower effective tax rate of 25% vs. 28% in FY22.

• QoQ, 4QFY23 revenue declined by 5% amid weaker consumer sentiments and cautious spending pattern. However, 4QFY23 net profit rose by 11% QoQ to RM148mil due to lower tax rate of 16% vs. 33% in 3QFY23.

• Despite these challenges, we continue to identify food inflation and geopolitical tensions as Nestle’s biggest obstacle in the near-to-medium term.

• Major commodity prices remain above pre-pandemic levels , even though food commodity prices have softened. Cocoa and sugar prices are still trending upwards which could lead to 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 such as plant-based meals and drinks as well as confectionery and ice cream products that are expected to sustain revenue growth and attract new customers.

• 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 - 28 Feb 2024