We attended Nestle’s 4Q20 results briefing and came away feeling neutral on its prospects going forward. We keep our forecasts unchanged. Despite various efforts to strengthen its brand, we opine sales will continue to face challenges with the uncertain economic outlook coupled with additional on-going expenses from safety measures put in place. Maintain SELL call and TP of RM100.60 based on DDM valuation methodology (r: 6.6%; TG: 3.5%).

Below Are Key Takeaways From Nestle’s 4Q20 Results Briefing.

Plant-based solution factory. The new plant-based solution factory in Shah Alam is fully operational and expected to be officially launched soon. The factory is one of the two in Asia, with the other located in China. Capacity in Malaysia will be to cater the local and Asia market for both consumer and business segment. At this juncture, Nestle is supplying to Kyochon for their meatless offerings. Compared to other meatless products that mostly cater to premium grocers, Nestle intends to tap into this market by supplying to the wider demographic. The revenue contribution will still likely be small for 2021 but management targets for this to expand and provide meaningful contribution in 2-5 years’ time. While vegan diets are gaining popularity in developed nations, we think it will still take a while for this to happen in Malaysia.

Higher commodity price. The volatility of commodity prices will be offset by initiative on internal savings and hedging policy put in place. 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.

Covid-19 related expenses. Following the third wave of Covid-19, the group have started to conduct Covid-19 tests on a regular basis. To date, around 140,000 Covid- 19 screenings have been conducted (roughly 1000-2000 tests per day) since early Oct 2020. Despite the improving situation in Selangor, the management expects the expenses will still be significant in 1H21.

Online sales continue to grow. The sales from online platform have seen a good traction buoyed by the shift in consumer behaviour. However, at this juncture majority of the sales are still contributed from the brick and mortar channel and the management foresees that this will continue to be the main driver moving forward. Efforts have been put in place to ride on the e-commerce platform and the group targets for online contribution to steadily hover around 10% for the next 3 years.

Outlook. With the further easing of restrictions for dine-in, we expect HORECA channel to recover albeit slowly, moving forward. Despite the decreasing 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. 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. Unchanged.

Maintain SELL; TP RM100.60 based on an unchanged DDM (r: 6.6%, TG: 3.5%). Despite various efforts to strengthen its brand, we opine sales will continue to face challenges with the near term Covid headwinds and associated expenses. Nestle trades at a relatively high valuation level of 52.8x FY21 P/E and yielding only 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.

Source: Hong Leong Investment Bank Research - 25 Feb 2021