Nestle has allocated RM300m capex in FY21 (FY20: RM295m) to ramp up production capacity and efficiency upgrade. The group will continue to prioritize safety and supply continuity by conducting daily antigen screenings for its employees. Despite various efforts to strengthen its brand, we opine larger macro factors such as steeper raw material costs, higher freight costs and tepid export sales are expected to be a bane for the group. Maintain SELL call and TP of RM98.55 based on DDM valuation methodology.

Below Are Key Takeaways From Nestle’s 1Q21 Results Briefing.

Highest capex in 6 years. Nestle has allocated RM300m capex in FY21 (FY20: RM295m) to ramp up production capacities and efficiency upgrades in several factories. We gather the majority of the portion is dedicated to its Maggi factory in Batu Tiga following the full capacity utilisation driven by robust demand across Maggi brands (noodles, seasoning paste, etc).

Covid-19 related expenses to weigh margin. The group will continue to prioritize safety and supply continuity by adhering to strict SOPs and conducting daily antigen screenings. To date, around 8k-12k weekly Covid-19 screenings have been conducted for its employees. Note that Nestle incurred higher cost of RM22m for the Covid-19 related expenses in 1Q21 (GP margin: -0.5ppt QoQ; -0.9ppt YoY).

Malaysian mobility severely impacted during MCO2.0. We gather that 1Q21 mobility was lower by ~40% compared to Jan 2020 baseline. Recovery was only seen in the final weeks of 1Q21 and management expects that full recovery will take time depending on the successful containment of Covid-19. We opine HORECA sector will continue to remain heavily impacted following various movement restrictions to curb the pandemic (e.g. recent MCO reimplementation in 6 Selangor districts).

Price increases a matter of last resort. 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. Being the important brand name across Malaysian households, Nestle remains mindful in keeping the affordability of its products. 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.

Continue to focus on environmental sustainability. Nestle plans to transition their products towards recyclable options. A key example moving forward will be their target to make Milo a plastic and carbon neutral product in Malaysia. While we do not see a material impact to earnings from this venture, visibility from this campaign should augur well amongst environmentally conscious consumers which have certainly been increasing in recent times.

Outlook. We expect the introduction of new innovative product offerings like Harvest Gourmet, Maggi paste recipe mix and Kit Kat gold to ignite consumer interests. Despite this, we opine larger macro factors such as steeper raw material costs, higher freight costs and tepid export sales are expected to be a bane for the group.

Forecast. Unchanged.

Maintain SELL; TP RM98.55 based on an unchanged DDM (r: 6.6%, TG: 3.5%). Nestle trades at a relatively high valuation level of 57.5x FY21 P/E and yielding only 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 - 5 May 2021