Nestle’s 1Q21 core PAT of RM178.0m (QoQ: +28.5%, YoY: -6.6%) was below ours and consensus expectations, making up 30%/28% of full year estimates, respectively. Note that 1Q typically accounts for approximately 35% of full year earnings. Despite in-home consumption improvements, YoY sales ended flat, dragged by moderated OOH channel that registered significantly below pre - pandemic baseline. We lower our FY21/22 earnings forecasts by 8%-12%. After rolling over our valuation year and earnings revision, our TP drops from RM100.60 to RM98.55 based on an unchanged DDM valuation methodology (r: 6.6%, TG: 3.5%).

Below expectations. 1Q21 core PAT of RM178.0m (QoQ: +28.5%, YoY: -6.6%) was below ours and consensus expectations, making up 30% and 28% of ours and consensus full year expectations, respectively. We deem this below expectations as 1Q typically seasonally accounts for approximately 35% of full year earnings. The shortfall was due to higher opex in Covid-19 related expenses coupled with weaker than-expected sales from HORECA channel. 1Q21 core PAT was arrived after adjusting for RM2.8m forex losses.

Dividend. None Declared (1Q20: None).

QoQ. Revenue rose 5.8% to RM1,448.8m due to increased sales associated with Chinese New Year festive season. Core PAT increased 28.5% to RM178.0m in tandem with higher sales coupled with increase in EBITDA margin recorded (+2.9ppt). Note that Nestle typically incurs a disproportionately higher amount of marketing spend in 4Q in preparation for festive season sales in 1Q of the following year.

YoY. In spite of robust in-home consumption with F&B growing by 5%, weaker out-of home (OOH) revenues resulted in overall flat top line (+1%). Weaker OOH sales were mainly due to the Covid-19 impact, as sales to restaurants and coffee shops moderated during MCO2.0, which began in mid-Jan. Despite flattish top line, core PAT dropped -6.6%. This was mainly due to higher commodity costs and higher operating expenses from safety measures implemented in response to Covid-19 outbreak.

Outlook. Despite higher commodity costs and tepid export sales, we do not expect Nestle to raise shelf prices, particularly given the weak consumer sentiment. With the ongoing dire situation in rising number of Covid-19 cases 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. We updated our model for FY20 audited accounts, introduce in FY23 forecasts, as well as reduce FY21-22 earnings by 8%-12% to reflect in 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 RM100.60 to RM98.55 based on an unchanged DDM valuation methodology (r: 6.6%, TG: 3.5%). At current price, Nestle is trading at 57.6x FY21 P/E and yielding an unattractive 1.7%. In comparison, its holding-co in Switzerland trades at a cheaper 24.5x FY21 P/E while its sister-co in Nigeria trades at 25.6x FY21 P/E. As valuation remains rich, we maintain our SELL call.

Source: Hong Leong Investment Bank Research - 28 Apr 2021