Nestle’s double-digit growth prompts analysts to raise target prices, but it still doesn’t get a ‘buy’ call

KUALA LUMPUR (April 27): Nestle (M) Bhd's double-digit earnings growth for the first quarter ended March 31, 2022 (1QFY22) has reinforced the belief that consumer spending will recover as the government loosen the movement restrictions further.

The food giant’s strong earnings have prompted a number of investment analysts to raise their target prices.

Despite the higher target prices, a few research outfits namely MIDF Investment Bank Bhd (MIDF), Kenanga Investment Bank Bhd and Hong Leong Investment Bank Bhd (HLIB) have yet to put Nestle on their buying list as they are cautious due to rising food commodity costs caused by the ongoing Russia-Ukraine war.

Analysts expect that the group's hotels, restaurants and cafes (HORECA) segment will recover due to relaxation of Covid-19 pandemic constraints, resumption of social activities, and positive sales in the upcoming Hari Raya Aidilfitri season, which will improve Nestle's revenue growth.

Nestle reported a 17.14% increase in net profit in 1QFY22 to RM205.18 million from RM175.16 million a year ago, supported by stronger sales and lower expenses related to Covid-19.

MIDF raises its target price for Nestle to RM141.50, up by 21.6% from RM116.35 previously. “Our target price is based on the DDM (dividend discount model)-derived valuation with a sustainable growth rate of 2.4% and cost of equity of 4.7%,” it wrote in a client note dated April 27.

MIDF upgraded Nestle's rating from 'sell' to 'neutral'. “While we are sanguine about Nestle due to its strong market position coupled with its good fundamentals, we note that the group is currently trading at a PE [price-to-earnings] of 52.9 times which is 133% premium compared to the industry’s average of 22.7 times.”

With Nestle's food products making up a large portion of consumers' staple diet, Kenanga warned that any price increases may not be enough to offset the sharp rise in input costs.

Kenanga maintained its "market perform" recommendation on Nestle, with a higher target price of RM136.50 (from RM133.90).

“We moved our valuation base to FY23E PER of five-year mean of 50.2x (previously at 66.4x — attaching +1SD to the stock 5-year mean),” said Kenanga’s analyst Ahmad Ramzani Ramli.

“We feel this is justified given that the stock has been trading between 40-50 times PER as input costs remain elevated with inflation costs creeping in. Compounded by uninspiring dividend yields and fully valued, we retain it at ‘Market Perform',” he explained.

HLIB commented that the reduction in Covid-19 related expenses will help to ease pressure on Nestle’s bottom line in light of elevated commodity prices.

“Overall, we note that off-trade channels were boosted by the launch of new products which include introduction of low-fat, low-salt Maggi Nutri-licious Noodles range, and Maggi Chicken Marinade pastes and Nestle Musang King Ice Cream,” said its analyst Syifaa’ Mahsuri Ismail.

HLIB’s Syifaa, however, kept his “sell” call, but he revised the target price to RM109.30 from RM107.

“At current price, Nestle is trading at 56.6 times FY22 P/E and yielding an unattractive 1.8%. In comparison, its holding company in Switzerland trades at a cheaper 26.7 times FY22 P/E while its sister company in Nigeria trades at 25.4 times FY22 P/E. As valuation remains rich, we maintain our ‘Sell’ call,” said Syifaa' Mahsuri. 

Earnings forecasts

MIDF's earnings estimates for Nestle were raised by 19% and 23.75% for the financial year ending Dec 31, 2022 (FY22) and FY23 respectively.

The research house expects Nestle's annual net profit to grow to RM695.3 million in FY22 and RM737.8 million in FY23. The forecast revenue is at RM5.79 billion in FY22 and RM6.03 billion in FY23.

“We also think that with its track record of managing cost structures through internal efficiencies, the group will be able to withstand the challenging business environment,” said MIDF.

Kenanga, meanwhile, raised Nestle's net profit projection for FY22 by 49% to RM703 million on revenue of RM6.16 billion. This was due to a higher earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 20% (from 16% previously) and higher domestic/export sales of 7%/10% (from 4%/1%).

Kenanga's forecast for Nestle's FY23 net profit was RM638 million on revenue of RM6.45 billion.

In contrast, HLIB has marginally revised down its FY22 and FY23 profit forecasts by 1.3%-0.9% following Nestle's latest annual report updates.

HLIB's net profit forecasts, however, are relatively lower with net profit of RM552.7 million for FY22 and RM660.1 million for FY23. Revenue forecast is at RM6.08 billion for FY22 and RM6.45 billion in FY23.

Nestle’s share price fell 10 sen to close at RM133.30 on Wednesday, valuing the group at RM31.26 billion.