• Overview. Sales for 1Q20 fell 1.3% yoy to RM1435m. The weaker results were driven by lower domestic sales of -3.4%, although there is a strong growth in export sales of +8.8%. On qoq basis, sales improved by 8% supported by increase in demand during Chinese New Year festival. Net profit fell by 20.8% yoy to RM186m.

• Key highlights. Nestle said it is committed to build long-term sustainability by adding new manufacturing capabilities, which includes expansion in MAGGI noodles capacity factory. The total capex allocation will be RM280m this year, the biggest since the last 6 years.

• Against estimates: inline. Nestle’s net profit of RM186m, met our full expectation, i.e making up 26% of our FY20 forecast. Profit margin was compressed by 320 bps from 16.2% to 13.0% during the same period due to higher commodity prices and Covid-19 outbreak which prompted the government to implement the MCO.

• Dividend. As expected, no dividend was declared for the quarter under review.

• Outlook. As we move into post-MCO environment, we expect Nestle’s prospect to remain challenging, especially in 2Q20, as consumers adjust to ’new normal’ pattern. We believe stringent measures, i.e. limited headcount allowed into the hyper market, long queue due to social distancing order could affect consumer behaviour, hence risking product demand. Nevertheless, we believe with the new CAPEX allocation and the expansion of Maggi noodles factory would help sustain Nestle’s long-term growth. On the positive side, we expect consumer demand to gradually increase in conjunction with Raya Aidilfitri festival ahead. We retain our forecast for FY20 at this juncture.

• Our call. Maintain HOLD with DDM-derived TP of RM152 based on WACC of 6.2%.

Source: BIMB Securities Research - 6 May 2020