• Overview. Nestle reported a lower 2Q20 turnover of RM1219.3m (- 15.0% qoq) and a PBT of RM140.1m (-43.1% qoq). Key to earnings decline include; i) severe operational restrictions on HORECA (Hotel, Restaurant & Café) channels ii) lesser public mobility affecting restaurant, R&R and office related channels sales during the MCO. The lockdown saw Nestlé’s professional business which cater for Out-of Home channels as well as Ready-to-Drink and several food products also affected.

• Key highlights. Nestle rolled out new products for 2H20, including an extension of Starbucks-at-home range, NESCAFÉ Gold Origins, Ready to-Drink products such as NESCAFÉ Ice Cappuccino, NESCAFÉ Cold Brew Hazelnut and NESTLÉ OMEGA PLUS Dark Chocolate, and MAGGI Goreng extension.

• Against estimates: Below. 2Q20’s net profit shrank 32.7% to RM105.5m which is below our forecast at 41%, as slowdown in HORECA business during MCO hammered confectionary products demand. Additionally, extra expenses to support the front liners and work safety feature against Covid-19 partially hit the bottom line too.

• Dividend. A DPS of 70 sen was declared, going ex on 14 Sep 2020 (2Q19: 70 sen/share). There was no dividend declared for 1Q20. We estimate a total DPS of 290 sen for FY20 vs 280 sen paid for FY19.

• Outlook. This year’s capex allocation of RM280m includes a significant investment in Shah Alam factory (Plant Based-Meal Solutions) as guided by management. We are positive on this expansion program, and coupled with the resumption of HORECA channels activities, Nestle is expected to see recovery in consumer spending ahead. We expect sales would pick up in 2H20 as the economic recovery gathers momentum, hence we make no changes to our forecast.

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

Source: BIMB Securities Research - 26 Aug 2020