4Q20 core PAT of RM138.6m (QoQ: +10.6%, YoY: +3.9%) brought the FY20 sum to RM553.2m (YTD: -16.8%). This was below ours but within consensus expectations, making up 89% and 98% of full year estimates, respectively. The deviation was on the back of (i) lower sales and (ii) higher expenses related to Covid-19. With the further easing of restrictions for dine-in, we expect HORECA channel to recover, albeit slowly moving forward. Additionally, we opine the going expenses related to Covid-19 will continue to result in slimmer margins in the near term. We revise our FY21/22 earnings downward by -11%/-5%. Maintain SELL call and lower TP of RM100.60 based on DDM (r: 6.6%, TG: 3.5%).

Below ours but in-line with consensus. 4Q20 core PAT of RM138.6m (QoQ: +10.6%, YoY: +3.9%) brought the FY20 sum to RM553.2m (YTD: -16.7%). This was below our but in-line with consensus expectations, making up 89% and 98% of full year estimates, respectively. The deviation was on the back of (i) lower sales recorded and (ii) higher expenses related to Covid-19 safety measures. FY20 core PAT was arrived at after adjusting for RM527k forex loss.

Dividend. DPS of 92 sen (4Q19: 140 sen) was declared, going ex on 20 Apr. FY20 DPS amounted to 232 sen (FY19: 280 sen).

QoQ. Topline remain flattish -1.3% at RM1.4bn. In spite of this, core PAT registered an increase of +10.6% thanks to better gross profit margin recorded (+0.3ppt) coupled with lower effective tax rate of 20.9% (vs 24.9% in 3Q20).

YoY. Overall sales rose slightly by +3.1%, owning to the growth (+6%) in food and beverage segment driven by strong in-home consumption. This was however partially offset by the decline in out-of-home (OOH) channels as movement restrictions impacted the sales. Subsequently, core PAT registered an increase of +3.9%.

YTD. FY20 top line slipped by -1.9% to RM5.4bn. This was due to the pandemic impact that affected the OOH business. The group core F&B business still staged a 2.3% growth from the successful sales execution and brand campaigns such as the Nestlé Salary For Life Contest, the Milo 70 Years celebrations and Maggi Confirm Malaysia campaign. Bottom line ended lower by -16.8% on the back of higher opex from Covid-19 related expenses amounting to RM62m.

Outlook. Despite higher commodity costs and tepid export sales, we do not expect Nestle to raise shelf prices, particularly given the weak consumer sentiment. Additionally, depreciation of USD against MYR bodes well for the group as 50% of its raw materials are denominated in USD. This however could be neutralized by the export sales that consists c.20% of total revenue. With the further easing of restrictions for dine-in, we expect HORECA channel to recover albeit slowly, moving forward. Additionally, we opine that the ongoing expenses related to Covid-19 and higher commodity prices will continue to result in slimmer margins in the near term.

Forecast. We revise our FY21/22 earnings downward by -11%/-5% to factor in the challenging sales outlook coupled with continual Covid-19 related expenses.

Maintain SELL. After our earnings adjustment, our TP falls from RM103.00 to RM100.60 based on an unchanged DDM (r: 6.6%, TG: 3.5%). At current price, Nestle is trading at 52.7x FY21 P/E and yielding an unattractive 1.7%. In comparison, its holding-co in Switzerland trades at a cheaper 22.1x FY21 P/E while its sister-co in Nigeria trades at 23.9x FY21 P/E. As valuation remains rich, we maintain our SELL call.

Source: Hong Leong Investment Bank Research - 24 Feb 2021