We attended Nestle’s 2Q20 results briefing and came away feeling slightly pessimistic on its prospects going forward. We keep our forecasts unchanged. Despite relaxation of MCO rules signalling a return to normalcy, we note that Nestle will not benefit from “panic buying” in 2H20, whilst continuing to incur on-going expenses from safety measures put in place. Maintain SELL call and TP of RM103.45 based on DDM valuation methodology (r: 6.6%; TG: 3.5%).

We attended Nestle’s 2Q20 results briefing and came away feeling slightly pessimistic on its prospects going forward.

Plans of opening a plant-based solution factory in Malaysia. Nestle plans to develop a plant-based solution factory in Malaysia, which is expected to be functional by 1H21. Nestle intends to use the Malaysian plant for export to the Asian market in order to ride on the growing demand for plant-based products (i.e. rising veganism trend). This plant is estimated to take up at least half of the projected capex of 2020

Introduction of new products. Given the restrictions on public gatherings and events during the MCO period, Nestle shared that they have pushed back the launch of new products to 2H20. These new products include Milo Active Go plus fibre, Maggi Mi Goreng, new La Cremeria ice cream flavours and more. We estimate new products typically make up approximately 10% of Nestle’s annual sales.

Product packaging transitions. Nestle plans to transition their products towards recyclable options, a key example moving forward will be their substitution of the plastic straws in their Milo packets with paper straws and the use of partially recyclable Nescafe packaging.

2H20 earnings outlook. We expect sales to shift back to HORECA channels from off-trade in 2H20 (vs. 1H20) as consumers feel lesser need to stock up on staples (Maggi Mee, Milo Powder etc.) and return to dining out. Despite encouraging domestic Covid-19 case numbers, we expect Nestle to continue with safety measures in order to ensure the safe production of food products, which should continue to result in higher operating expenses. Nestle shared that additional safety procedures put in place during 2H20 have amounted to ~RM50m in additional operational expenses thus far.

Forecast. Unchanged.

Maintain SELL. Despite relaxation of MCO rules signalling a return to normalcy, we note that Nestle will not benefit from “panic buying” in 2H20, whilst continuing to incur on-going expenses from safety measures put in place. Furthermore, we continue to believe Nestle trades at an unreasonably high valuation level of 51.1x FY20 PE and yielding an unattractive 2.0%. By comparison, its holding-co in Switzerland trades at a cheaper 25.9x FY20 P/E while its sister-co in Nigeria trades at 21.7 P/E. Maintain SELL call and TP of RM103.45 based on DDM valuation methodology (r: 6.6%; TG: 3.5%)

Source: Hong Leong Investment Bank Research - 27 Aug 2020