• Nestle’s FY23 results announced on 27 Feb were in line with our/Bloomberg consensus’ FY23F estimates at 101%/105%.

• While management’s cautious tone during its analyst briefing is noted, we expect improved economic activity to keep FY24F revenue growth positive.

• Reiterate Hold on Nestle, with a revised DCF-derived price target of RM122; valuations at 36.7x FY24F P/E cap upside, in our view.

Results in line, at 101% of our estimates

Nestle (Malaysia)’s FY23 core net profit of RM747m (+27.8% yoy), reported on 27 Feb, were in line with our/Bloomberg consensus’ estimates, at 101%/105%. A third interim dividend of RM1.28/share brought FY23 DPS to RM2.68 (+2.3% yoy, 95% payout), representing 90% of our and 89% of consensus’ FY23F estimates. A RM42.6m impairment of fixed asset charge in 4Q23 brought FY23 fixed asset impairments to RM87m. According to management, this was a result of its ongoing modernisation and upgrade programme, which covers its manufacturing as well as IT systems.

Cautious outlook, but we see positives ahead

During its FY23 results analyst briefing, management noted that Malaysian consumers have, since 3Q23 and through 4Q23, been a little more careful in their spending habits. FY23 domestic revenue rose 9.9% yoy, having expanded by >10% in the three prior quarters (1Q23-3Q23). We believe improved policy direction by the government should be positive for economic growth in 2024F, with CGSI Research’s Economics team forecasting 2024F real GDP growth of 4.6% yoy, with private consumption growth of 6.5%. We also note that increased cash handouts to lower income households, should be supportive of demand for consumer staples as provided by Nestle. We estimate Nestle’s domestic revenue to expand 4% in FY24F. Management stated that it would avoid price increases for now, despite elevated prices of cocoa and coffee, as it expects these to ease. It added that it will reevaluate the situation as its current price hedges run out.

Hold maintained – steady delivery, but rich valuations

We maintain our Hold call on Nestle, with an increased DCF-derived price target of RM122 as we adjust our estimates and roll forward our basis period. We see Nestle’s 36.7x FY25F P/E vs. regional consumer peers’ <30x (see Fig 8) as the key cap on its share price upside. Key upside risks would come from an accelerated revenue growth trajectory, while weakening consumer sentiment with higher raw material costs would be the greatest downside risks in our view.

Source: CGS-CIMB Research - 28 Feb 2024