Despite the initiatives on internal savings and hedging policy, the prolonged volatility of commodity prices prompts Nestle to increase shelf prices across different segments of its products. We expect demand to be affected as price sensitivity might motivate consumers to switch to more affordable options in the near term. For sugar tax on pre-mixed drinks, we understand that Nestle will reformulate its products to bring down sugar content to be within the nontaxable limit. We adjust our FY22 forecast downward by -10% to account for the prosperity tax. We opine larger macro factors such as steeper raw material costs and higher freight costs will be banes for the group. Maintain SELL with lower TP RM107.00 (from RM107.25).

The Following Are the Key Takeaways From Nestle’s 3Q21 Results Briefing:

Price hikes are unavoidable. Despite the initiatives on internal savings and hedging policy, the prolonged volatility of commodity prices prompts Nestle to increase shelf prices across different segment of its products. Given the challenging economic environment and weak consumer sentiment, we expect demand to be affected as price sensitivity might motivate consumers to switch to more affordable options in the near term.

Sugar tax on pre-mixed drinks. In the recent tabling of Budget 2022, the government intends to extend the imposition of excise duty on sugary beverage to include pre-mixed drink products in the form of chocolate, cocoa, malt, coffee and tea. We understand that Nestle will reformulate its products to bring down sugar content to be within the non-taxable limit. This is in line with the group’s commitment to produce healthier and more nutritious products, at the same time cater to local taste buds.

Covid-19 related expenses to linger on. The group will continue to prioritize safety and supply continuity by adhering to strict SOPs. Despite the encouraging vaccination rate, the volatile external factors with emerging variants remain a threat, hence we opine that Covid-19 related cost will still be a drag moving forward. To date, Nestle has spent RM65m on Covid-19 related expenses and management expects the figure to match FY20 outlay of RM100m.

Capex plan still intact. Nestle has allocated RM300m capex in FY21 (FY20: RM295m) to ramp up production capacities and efficiency upgrades in several factories. We gather that the majority is dedicated to its Maggi factory in Batu Tiga following the full capacity utilisation driven by robust demand across Maggi-branded SKUs (noodles, seasoning paste, etc). The capex allocation remains intact, albeit with slow deployment (41% utilized as at Sept 2021) impacted by construction restrictions. However, with the resumption of construction activities, Nestle expects this to ramp up with the possibility of spilling over to FY22.

Forecast. We Adjust Our FY22 Forecast Downward by -10% to Account for the Prosperity Tax.

Maintain SELL; with slightly lower TP: RM107.00 (from RM107.25) based on an unchanged DDM (r: 6.6%, TG: 3.5%). We continue to believe Nestle trades at an unreasonably high valuation level of 54.5x FY21 EPS and yielding an unattractive 1.8%. Additionally, we opine the larger macro factors such as steeper raw material costs and higher freight costs are expected to be banes for the group.

Source: Hong Leong Investment Bank Research - 5 Nov 2021