Nestle’s 1QFY23 net profit of RM197.1mn (QoQ: +48.4%, YoY: -3.9%) was in line with ours and consensus expectations accounting 27.4%  and 27.7% of full year estimates respectively. Nestle products being  daily necessities, will continue to have a healthy demand, to be  supported as well by product innovation and aggressive marketing  initiatives. Margin is expected to improve, especially in 2H2023, as  commodity prices are expected to gradually soften. Maintain a HOLD  call on Nestle, with DDM derived TP of RM139.00 (WACC: 6.8%, TG:  3%).

• Within expectations. 1QFY23 net profit of RM197.1mn (QoQ: +48.4%,  YoY: -3.9%) was in line with ours and consensus expectations  accounting for 27.4% and 27.7% of full year estimates respectively.

• Dividend. No dividend declared during this quarter.

• QoQ. Revenue increased by 11.8% QoQ mainly driven by higher CNY  sales. Net profit jumped even higher or by 48.4% QoQ on the back of  higher sales and lower overall operating expenses. This pushed profit  margin to improve by 2.6 ppts QoQ to 10.7%.

• YoY/ YTD. Revenue remained upbeat, with an improvement of +8.8%  YoY to RM1.8bn, supported by positive growth from both domestic  (+10% YoY) and export (+4% YoY) sales. This is thanks to the group's  effective demand generation efforts and continuous product  innovation, which helped the company remain in tune with consumers'  expectations. Additionally, the Food & Beverages (F&B) business and  the Out-of-Home business under Nestle Professional performed solidly  and continued their positive momentum post-pandemic. Despite the  higher top line, net profit dropped by 3.9% YoY, primarily due to higher  commodity prices and unfavourable exchange rate.

• Outlook. Moving forward, demand for Nestle products is expected to  remain healthy given that they are daily necessities. Sales are also likely  to be supported by ongoing product innovation and marketing  initiatives, despite inflationary pressures. Additionally, margin is  expected to improve particularly in 2H2023, as commodity prices are  expected to gradually soften. We estimate earnings to grow by 16% YoY  in FY23, mainly driven by stable sales, a normalization in tax rates, and  lower expenses related to COVID-19.

• Forecast. No change to our forecast.

• Our call. Maintain our forecast and a HOLD call recommendation with  unchanged TP of RM139.00. Our valuation is DDM-based (WACC: 6.8%,  TG: 3%), which implies 45.3x PER for FY23F. We believe current  valuation has largely accounted its resilient fundamentals.

Source: BIMB Securities Research - 26 Apr 2023