• Overview. Nestlé’s 2Q22 net profit increased to RM169.7mn (+26.1% YoY) owing to the higher sales (domestic: +12.5%, export +48.1%) coupled with lower Covid-19 related expenses. On QoQ basis, net profit decreased by 17.3% mainly due to lower sales and higher operating cost especially commodity prices. Profit margin QoQ fell by -1.8 ppts to 10.4%.

• Key highlights. Nestle’s 1H22 registered strong sales in both domestic (+13.7% YoY) and export (+36.1% YoY). This was driven by pent up demand during CNY and Raya Adilfitri festive seasons as well as boost in Out-of-Home (OOH) consumption and HORECA channels post lockdown and travel restriction.

• Against estimates: Inline. 1H22 net profit of RM374.8mn makes up 64%/62% of our/consensus full year forecast. We deem this in line as 1H is usually seasonally higher with lower margin expected for 2H22.

• Dividend. An interim dividend of 70sen was declared (vs 1H21: 70 sen). We maintain our FY22 DPS forecast at 260sen, translating into 1.8% DY.

• Outlook. Challenging outlook for 2H22 with headwinds such as ongoing supply chain disruptions and geopolitical tensions may push up inflation which could dampen consumer spending. Additionally, earnings are likely to be soft due to reduce profit margins caused by i) rise in key commodity prices, ii) increase import costs as Ringgit weaken, and iii) higher freight cost. We believe Nestle may not be able to fully pass on the increase in prices to consumers to avoid stifling consumption demand.

• Our call. No adjustment to our forecast at this juncture and we maintain a HOLD call with TP of RM134.00, based on DDM methodology of WACC: 6.8% & TG: 3%. This implies 45.5x PER for FY23F. The c.30% premium to consumer staples sector average PE is justified given Nestle’s established brand name, strong fundamentals and inelastic demand for its products. Risk to our call is higher sales and better margin than expected due to improve cost efficiency.

Source: BIMB Securities Research - 29 Jul 2022