We attended Nestle’s 3Q19 results briefing and came away feeling neutral to slightly pessimistic on its prospects going forward, particularly given the lack of concrete plans to boost ailing export sales. Forecasts are unchanged. Our SELL call and TP of RM102.00 pegged the DDM valuation methodology (r: 6.8%, TG: 3.5%) remains unchanged. At current price, Nestle is trading at 48.8x FY19 P/E and yielding an unattractive 2.0%. In comparison, its holding-co in Switzerland trades at a cheaper 23.6x FY19 P/E while its sister-co in Nigeria trades at 17.5x FY19 P/E.

We attended Nestle’s 3Q19 results briefing and came away feeling neutral to slightly pessimistic on its prospects going forward.

No end in sight for ailing export sales. Nestle’s poor export sales in 9M19 continued to plague the group, with export sales declining 8.0% YoY. Note that in total, Nestle exports to approximately 50 countries given its reputation as a producer of halal certified products and Malaysia’s proximity to other ASEAN neighbours. Historically, exports sales make up approximately 20% of the group’s total sales. While Nestle shared they will continue to look for opportunities to grow export sales, it does not seem like the group has a concrete plan to increase export sales in FY20.

Positioning itself for growth of e-commerce economy. E-commerce in Malaysia continues to grow (with a reported 7.9% of all households purchasing food items online in 2019 vs just 2% in 2014 according to market research firm Kantar). Nestle shared they will continue to grow their online presence with various tie-ups alongside e-commerce market leaders (Shoppee and Lazada), evidenced by total online sales from 11.11 day topping RM11m in FY19 (up from RM4.4m in FY18). In addition to core brands, Nestle intends to grow sales of premium product online, including Nestle Dulce Gusto and refillable pods (Figure #1).

Rise of the paper straw. With growing concerns amongst environmentally conscious consumers, Nestle shared that they will replace plastic straws that come with 125ml packet Milo and Nutripluz packet with paper straws (Figure #2) in Dec 2019. With a combined estimated annual sale volume of 50m packets of these two SKU’s, the amount of plastic waste, which would end up in landfills, would be reduced. Nestle also shared they intend to eliminate over 160m plastic straws per annum by switching to paper straws for all its packet Milo products in the future. While we do not see a material impact to earnings from this venture, visibility from this campaign should augur well amongst environmentally conscious consumers which have certainly been increasing in recent times.

Outlook. On-going decline in export sales remains a concern for the group. Nestle will continue to drive sales growth with the introduction of innovative new products, which we estimate to make up approximately 10% of total sales. Despite higher commodity costs and tepid export sales, we do not expect Nestle to raise shelf prices, particularly given the current rising cost of living.

Forecast. Unchanged.

Maintain SELL. Our SELL call and TP of RM102.00 pegged to the DDM valuation methodology (r: 6.8%, TG: 3.5%) remains unchanged. At current price, Nestle is trading at 48.8x FY19 P/E and yielding an unattractive 2.0%. In comparison, its holding-co in Switzerland trades at a cheaper 23.6x FY19 P/E while its sister-co in Nigeria trades at 17.5x FY19 P/E.

Source: Hong Leong Investment Bank Research - 20 Nov 2019