3Q20 core PAT of RM125.3m (QoQ: +26.6%, YoY: -16.9%) brought 9M20 sum to RM414.7m (YoY: -22.3%). This is below ours and consensus expectations, making up 64.8% and 65.7% of full year expectations, respectively. We lower our FY20/21/22 earnings forecasts by 2.6%/2.5%/1.2% to account for weaker expected sales. After our earnings adjustment, our TP falls from RM103.45 to RM103.00 based on an unchanged DDM (r: 6.6%, TG: 3.5%).

Below expectations. 3Q20 core PAT of RM125.3m (QoQ: +26.6%, YoY: -16.9%) brought 9M20’s sum to RM414.7m (YoY: -22.0%). This was below ours and consensus expectations, making up 64.8% and 65.7% of full year expectations, respectively. The shortfall in earnings was due to weaker-than-expected sales to HORECA (hotels, restaurants, cafes) channels and higher-than-expected operating expenses from the implementation of safety measures in food production processes to combat the spread of Covid-19. 9M20 core PAT was arrived at after adjusting for RM5.6m forex gain.

Dividend. Declared DPS of 70 sen which goes ex on 26 Nov 2020 (3Q19: 70 sen). 9M20 dividend amounted to 140 sen (9M19: 140 sen) per share.

QoQ. Sales rose of 13.9% due to low base effect. Note that sales in 2Q20 were particularly weak due to lacklustre sales to HORECA channels during which operations were impacted from the MCO period. Nestle guided recovery in sales were partially attributed to recovery in out-of-home sales channels (HORECA, offices, etc.) due to relaxation of MCO rules during 3Q20. Overall, core PAT increased by 26.6% due to higher sales as well as lower covid-19 related expenses.

YoY. Despite robust in-home consumption, revenue was down slightly (-0.9%) due to HORECA channels was weaker than SPLY levels. Core PAT declined by -16.9% due to weaker HORECA sales and on-going expenses relating to workplace safety with regards to the Covid-19 outbreak.

YTD. Sales decline of -3.5% and subsequent core PAT decline of -22.0% was due to impact of MCO to HORECA operators and additional expenses related to Covid-19, as mentioned above.

Outlook. While sales have started to shift back to HORECA channels in 3Q20, we reckon it will remain below 2019 levels for the remainder of 2020 given the resumption of CMCO restrictions in a number of states and therefore sluggish HORECA operations.

Forecast. We lower our FY20/21/22 earnings forecasts by 2.6%/2.5%/1.2% to account for weaker expected sales.

Maintain SELL. Reimplementation of CMCO remains a bane for Nestle given their exposure to out-of-home consumption. Furthermore, we expect on going expenses related to Covid-19 to continue to result in slimmer margins vs. 2019 for the foreseeable future. After our earnings adjustment, our TP falls from RM103.45 to RM103.00 based on an unchanged DDM (r: 6.6%, TG: 3.5%)

Source: Hong Leong Investment Bank Research - 17 Nov 2020