3Q21 core PAT of RM144.7m (QoQ: +7.6%, YoY: +15.5%) brought 9M21’s sum to RM457.7m (YoY: +10.3%). This is broadly in line with our and consensus full year expectations, making up 79% and 75%, respectively. Overall top line increased by 3.6% YoY and 5.6% YTD aided by recovery in domestic and export sales. We expect Nestle to continue with Covid-19 safety measures in order to ensure uninterrupted production, which should lead to higher operating expenses. The heightened volatility of raw material costs could pose a threat of deteriorating margins moving forward. The group expects the impact to be more pronounced in the coming months and even more in 2022. Maintain SELL with unchanged TP of RM107.25.

Broadly within estimates. 3Q21 core PAT of RM144.7m (QoQ: +7.6%, YoY: +15.5%) brought 9M21’s sum to RM457.7m (YoY: +10.3%). This is broadly in line with our and consensus full year expectations, making up 79% and 75%, respectively. 9M21 core PAT was arrived at after adjusting for RM506k forex gain.

Dividend. Declared DPS of 70 sen/share going ex on 24 Nov 2021 (3Q20: 70 sen/share). 9M21 DPS: 140 sen (9M20: 140 sen).

QoQ. Revenue improved by +4.3% to RM1.4bn driven by the increase in export sales. EBITDA margin climbed by 1.7ppt on the back of lower marketing cost with the restrictions imposed during Phase 1&2. Subsequently, core PAT registered +7.6% improvement to RM144.7m.

YoY/YTD. Top line growth was a tad up by 3.6% YoY/5.6% YTD aided by recovery in domestic and export sales with YoY growth of 3.4% and 4.5%, respectively. Bottom line staged a 15.5% YoY/ 10.3% YTD increment on the back of top line acceleration coupled with expansion in EBITDA margin by 2.4ppt YoY. This was attributable to lower marketing expenses with stricter Phase 1&2 restrictions vs looser restrictions in 3Q20 with RMCO.

Outlook. We opine sales for HORECA channels to gradually improve from further easing of restrictions with permission to dine-in for fully vaccinated consumers. We expect Nestle to continue with Covid-19 safety measures in order to ensure uninterrupted production, which should lead to higher operating expenses. Additionally, the heightened volatility of raw material costs could pose a threat of deteriorating margins moving forward. The group expects the impact to be more pronounced in the coming months and even more in 2022. Overall, we note that offtrade channels were boosted by the launch of new products which include introductions of Nescafe Ready-To-Drink limited editions (Gula Melaka, Pandan and Bandung), Nescafe Ice Caffe Latte, Kit Kat chunky raisin and Onde Onde ice cream.

Forecast. Unchanged.

Maintain SELL, TP of RM107.25 is unchanged based on DDM (r: 6.6%, TG: 3.5%) valuation. 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 54.8x FY21 EPS and yielding an unattractive 1.8%. By comparison, its holding-co in Switzerland trades at a cheaper 27.0x FY21 EPS while its sister-co in Nigeria trades at 24.8x FY21 EPS.

Source: Hong Leong Investment Bank Research - 3 Nov 2021