1Q20 core PAT of RM190.5m (QoQ: +42.8%, YoY: -20.3%) was below ours (25.5% of FY estimate) and consensus expectations (27.2%) as 1Q typically accounts for ~35%. We lower our FY20/21 earnings forecasts by 10.4%/9.9% to account for weaker-than-expected sales and higher-than-expected expenses from safety measures implemented in response to Covid-19 outbreak. After rolling over our valuation year and earnings revision, our TP drops from RM102.00 to RM100.55 based on an unchanged DDM valuation methodology (r: 6.8%, TG: 3.5%).

Below expectations. 1Q20 core PAT of RM190.5m (QoQ: +42.8%, YoY: -20.3%) was below ours and consensus expectations, making up only 25.5% and 27.2% of ours and consensus full year expectations, respectively. We deem this below expectations as 1Q typically accounts for approximately 35% of full year earnings. The shortfall in was due to weaker-than-expected domestic sales and higher-than-expected operating expenses from implementing necessary safety measures in food production processes in response to Covid-19 outbreak. 1Q20 core PAT was arrived at after adjusting for RM4.2m forex losses.

Dividend. None Declared (1Q19: None).

QoQ. Sales rose 7.9% to RM1,434.5m due to increased sales associated with Chinese New Year festive season. Core PAT increased 42.8% in tandem with higher sales in addition to lower marketing expenses in 1Q20. Note that Nestle typically incurs a disproportionately high amount of marketing expenses in 4Q in preparation for CNY in the following year.

YoY. In spite of stronger export revenues (+8.8%), weaker locals sales (-3.4%) resulted in lower overall sales (-1.3%). Weaker domestic sales were mainly due to the Covid-19 impact, as sales to restaurants and coffee shops declined during the MCO, which began in mid-March. Despite only marginal sales decline, core PAT dropped 20.8%. This was mainly due to higher commodity costs and higher operating expenses from safety measures implemented in response to Covid-19 outbreak.

Outlook. Despite consumers panic buying consumer staples with long shelf lives (Maggi Mee, Milo Powder, Nescafe etc.), the forced closure of restaurants, coffee shops and other dine-in outlets for a portion of 2Q20 is expected to result in tepid overall sales. Additionally, the continued safety measures put in place by Nestle are expected to result in higher operating expenses for the time being.

Forecast. We lower our FY20/21 earnings forecasts by 10.4%/9.9% to account for weaker-than-expected sales and higher-than-expected expenses from safety measures implemented in response to Covid-19 outbreak.

Maintain SELL. After earnings cut but partially offset by rolling forward of valuation year, our TP drops from RM102.00 to RM100.55 based on an unchanged DDM valuation methodology (r: 6.8%, TG: 3.5%). Nestle is currently trading at 48.8x FY20 P/E and yielding an unattractive 2.0%. In comparison, its holding-co in Switzerland trades at a cheaper 23.4x FY20 P/E while its sister-co in Nigeria trades at 15.2x FY20 P/E.

Source: Hong Leong Investment Bank Research - 6 May 2020