Nestle’s chalked in 4Q21 core PAT of RM115.5m (QoQ: -20%, YoY: -17%) which brought FY21 sum to RM572.7m (YoY: +4%). This is in line with our but below consensus full year expectations, making up 99% and 94%, respectively. Overall top line increased by 7% YoY and 6% YTD attributable to 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. Maintain SELL with unchanged TP of RM107.00.

Within our estimates but below consensus. 4Q21 core PAT of RM115.5m (QoQ: -20%, YoY: -17%) brought FY21’s sum to RM572.7m (YoY: +4%). This is in line with our but below consensus full year forecasts, making up 99% and 94%, respectively. FY21 core PAT figure was arrived at after adjusting for RM2.9m forex gain.

Dividend. Declared DPS of 102 sen/share going ex on 18 April 2022 (4Q20: 92 sen/share). FY21 DPS: 242 sen (FY20: 232 sen).

QoQ. Top line was fairly unchanged at +2% to RM1.5bn due to better export sales. EBITDA margin weaken by 4.4ppt on the back of higher operating expenses coupled with elevated commodity prices. The higher opex was due to low base effect on minimal marketing spend incurred in 3Q21 during the Phase 1/2 restrictions as well as additional expenses incurred due to the flood disaster in Dec 2021. Subsequently, core PAT registered a -20% decline to RM115.5m.

YoY. Revenue increased by 7% YoY aided by better domestic and export sales, which chalked in 6% and 11% growth respectively. Despite that, core PAT registered -17% decline due to (i) lower EBITDA margin by 2.0ppt and; (ii) higher effective tax rate 4Q21: 23.6% (vs 4Q20: 20.9%).

YTD. Sales remain in expansionary mode with an increment of 6% to RM5.7bn on the back of higher domestic (+6%) and export sales (5%). This was driven by the core F&B business, expanding by 6%. Subsequently, core PAT recorded a 4% increase to RM572.7m.

Outlook. We expect Nestle to continue with Covid-19 safety measures in order to ensure uninterrupted production, which should lead to higher operating expenses. For the full year FY21 the higher sales achieved with marketing efficiencies was slightly offset by the elevated commodity prices and significant Covid-19 related expenses which sums up to approximately RM93m. We opine that the heightened volatility of raw material costs would continue to pose a threat of deteriorating margins moving forward.

Forecast. Unchanged.

Maintain SELL, TP of RM107.00 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 57.1x FY22 EPS and yielding an unattractive 1.8%. By comparison, its holding-co in Switzerland trades at a cheaper 25.0x FY22 EPS while its sister-co in Nigeria trades at 22.7x FY22 EPS.

Source: Hong Leong Investment Bank Research - 23 Feb 2022