• Maintain HOLD (TP: RM134.20). Nestle’s 9MFY23 Net Profit of RM511.8mn (+5% YoY) were in line with ours and consensus expectations, accounting for 71% and 72% respectively. An interim DPS of 70sen was declared (vs 3Q22: 70 sen) and thus, maintain our FY23f DPS at 306sen, translating into 2.3% DY. Nestle’s 3QFY23 revenue and net profit both surged by +5.3% YoY and +18.7% YoY, driven by strong domestic sales especially in the core Food and Beverage (F&B) segments with successful new product launches. We maintain our forecast at this juncture, but we exercise cautious moving forward due to potential cost pressures from elevated USD/MYR currency exchange rates and higher commodity prices such as cocoa and raw sugar. Maintain a HOLD call on Nestle, with a lower DDM derived TP of RM134.20 (from RM139.00). We have relooked our valuation and lowering the terminal growth to account for unfavourable currency movements and the expectation of higher 2024 inflationary pressures. Our new valuation is based on DDM methodology with WACC: 6.6% and TG: 2% (previously WACC: 6.6%, TG: 3%). This implies a 40x PER for FY24F (below Nestle’s -1SD 5-years average forward PE).

• Key highlights. In 3QFY23, both revenue and net profit rose by +5.3% YoY and +18.7% YoY respectively to RM1,772mn and RM134mn, mainly driven by robust domestic sales (+11.7% YoY), offsetting the lower export sales growth. The boost in sales was further supported by successful product launches and innovation in the core F&B segments. However, on a QoQ basis, net profit experienced a decline of -26.1% QoQ due to higher overall operating expenses, resulting in a -0.4ppts net profit margin compression to 10.3%.

• Earnings Revision. No change at this juncture.

• Outlook. Looking ahead, we anticipate a steady sales growth driven by stable consumer spending on staple food items despite economic challenges. However, we remain cautious on potential cost pressures due to the elevated USD/MYR currency exchange rates and higher commodity prices, such as cocoa and raw sugar.

Source: BIMB Securities Research - 27 Oct 2023