2Q21 core PAT of RM134.5m (QoQ: -24.4%, YoY: +36.0%) brought 1H21 sum to RM312.5m (YoY: +8.0%), which is above ours but in line with consensus expectations at 58% and 50%, respectively. Overall top line increased by 13.2% YoY and 6.6% YTD on the back of robust domestic sales despite the moderated exports channel. We increase our FY21/22/23 earnings forecasts by 6%/8%/8% to account for higher revenue ahead of easing of restrictions for fully vaccinated consumers. Maintain SELL with a higher TP of RM107.25 (from RM97.23) based on unchanged DDM (r: 6.6%, TG: 3.5%).

Above expectations. 2Q21 core PAT of RM134.5m (QoQ: -24.4%, YoY: +36.0%) brought 1H21’s sum to RM312.5m (YoY: +8.0%). This is above ours but in line with consensus, making up 58% and 50% of full year expectations, respectively. The positive results surprise was on the back of our conservative revenue assumptions. 1H21 core PAT was arrived at after adjusting for RM2.8m forex losses.

Dividend. Declared DPS of 70 sen/share going ex on 14 Sep 2021 (2Q20: 70 sen/share). 1H21 DPS: 70 sen (1H20: 70 sen).

QoQ. Sales moderated by -4.8% to RM1.4bn due to high base effect from the CNY festive season in 1Q21. Core PAT declined further by -24.4% to RM134.5m on the back of (i) EBITDA margin contraction by 2.2ppt with rising commodity prices; and (ii) higher effective tax rate (2Q21: 24.0%; 1Q21: 20.5%).

YoY. Top line increased by 13.2% driven by strong domestic sales growth of 15.8%. Export sales registered a slight increase of 2.5% amidst operational restrictions. Bottom line staged a 36.0% increment on the back of top line acceleration coupled with EBITDA margin improvement by 1.2ppt.

YTD. Revenue rose by 6.6% aided by 7.7% domestic sale improvement while OOH business continued its gradual recovery against the low sales registered last year when restrictions first implemented. Subsequently, core PAT rose by 8.0% on the back of higher revenue coupled with lower tax thanks to reinvestment allowance tax incentive for the group’s new Plant-Based Meal Solutions (PBMS) facility.

Outlook. We expect sales for HORECA channels to gradually improve from further easing of restrictions with permission to dine-in for fully vaccinated consumers. 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. Overall, we note that off-trade channels were boosted by the launch of new products which include introduction of dairy-free versions of Milo and Nescafe, Lively Tea range, Kit Kat blocks and Harvest Gourmet.

Forecast. We increase our FY21/22/23 earnings forecasts by 6%/8%/8% to account for the deviation mentioned above.

Maintain SELL with a higher TP of RM107.25 (from RM97.23) based on unchanged DDM (r: 6.6%, TG: 3.5%). Despite the expected gradual improvement in sales we opine that the ongoing expenses related to Covid-19 and higher commodity prices will continue to result in deteriorating margins in the near term. Furthermore, we continue to believe Nestle trades at an unreasonably high valuation level of 54.0x FY21 EPS and yielding an unattractive 1.8%. By comparison, its holding-co in Switzerland trades at a cheaper 26.9x FY21 EPS while its sister-co in Nigeria trades at 24.1x FY21 EPS.

Source: Hong Leong Investment Bank Research - 25 Aug 2021