Nestle’s 1HFY23 Net Profit increased by 1% YoY to RM378.1mn mainly due to strong domestic sales, despite margin compression. Overall, the results were in line with ours and consensus expectations, accounting for 53.6% and 53.3% respectively. Moving forward, sales are expected to be supported by product innovation as well as marketing initiatives. Margin is expected to remain stable in 2H2023 as commodity prices gradually soften amid expected strengthening in Ringgit. We maintain a HOLD on Nestle, with a DDM derived TP of RM139.00 (WACC: 6.8%, TG: 3%).

• Within expectations. 1HFY23 Net Profit of RM378.1mn (+1% YoY) was in line with ours and consensus expectations, accounting for 53.6% and 53.3% respectively.

• Dividend. An interim DPS of 70sen was declared (vs 1H22: 70 sen). We maintain our FY23f DPS at 306sen, translating into 2.3% DY.

• QoQ. Nestle’s 2QFY23 revenue dipped by -5% to RM1.7bn due to high base effect from the CNY festive season in 1Q23. Net Profit declined further by -8.2% to RM180.9m, owing to i) lower sales; and ii) margin contraction by 0.4ppt caused by higher marketing expenses.

• YoY. Both 2QFY23 revenue and net profit grew by +6.8% YoY and +6.6% YoY respectively, supported by strong domestic sales (+11.6% YoY). In 2QFY23, the sales performance within the core Food and Beverage (F&B) segments showed strong performance, thanks to the successful launch of new products that driving the positive sales momentum during this period (e.g., MAGGI Mi Goreng Laksa Warisan, MAGGI Pedas Giler Cheezy Berapi, plant-based new Crispy Fish-Free Fingers, and NESCAFÉ 2 in 1 cold coffee mixes).

• YTD. Nestle’s 1HFY23 revenue jumped 7.8% YoY to RM3.6bn, driven by robust domestic demand. The Food and Beverage segment remained solid (+8% YoY), while the Out-of-Home business under Nestlé Professional continued its recovery momentum, supported by strong demand from Hotel, Restaurant & Café (HORECA) channels. Nevertheless, the profit margin dropped by 0.7ppts YoY to 10.5%, mainly due to marketing expenses, fluctuations in commodity prices, and unfavourable forex.

• Outlook. Moving forward, the demand for Nestle products is anticipated to remain robust, supported by their status as essential daily necessities and the easing of inflationary pressures. Sales are also likely to be supported by ongoing product innovation and marketing initiatives. Additionally, the margin is expected to remain stable in 2H2023 supported by gradually softening commodity prices, which will help mitigate other higher operating expenses as well as strengthening in Ringgit.

• 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 - 28 Jul 2023