Despite improvement in top line recorded, bottom line suffered through margin squeeze with elevated commodity and energy prices. The prolonged volatility of commodity prices prompted Nestle to increase shelf prices across different segments of its products. We expect demand to be affected as price sensitive consumers will be motivated to switch to more affordable options in the near term. Nestle assure s that the group will continue to use high quality natural ingredients while preserving ta ste taking into consideration of it being the main driver for demand. Maintain SELL with unchanged TP RM107.00.

The Following Are the Key Takeaways From Nestle’s 4Q21 Results Briefing:

Good product demand. To recap, 4Q21 recorded a sales growth of 7% YoY/6% YTD on the back of better domestic and export sales. We understand that growth was recorded across all Nestle brands in coffee, ice-cream, Kit-Kat, Maggi etc driven by product innovation. The group will continue its effort to understanding consumers better and venturing into new product segments. Additionally, 4Q21 recorded encouraging rebound in out -of-home (OOH) segment with reopening of economic activities.

Offset by pronounced elevated commodity price. Despite the top line improvement, bottom line suffered through margin squeeze with elevated commodity and energy prices. Note that bottom line chalked in -20% QoQ/ -17% YoY decline in 4Q21. Despite the initiatives on internal savings and hedging policy, the prolonged volatility of commodity prices prompted 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 sensitive consumers will be motivated 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. Despite some concerns on the reformulation content and the effect on consumers’ health, Nestle assures that the group will continue to use high quality natural ingredients. The reformulation of recipe will be based on preserving taste taking into consideration of it being the main driver for demand. 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.

Expect reduction in Covid-19 related expenses. The group will continue to prioritize safety and supply continuity by adhering to strict SOPs. With the encouraging vaccination rate and the shift to endemic phase the group has made several changes in its Covid-19 related SOP. Management shared that they are now changing to Covid-19 home test model instead of on-site testing facility which would cost less for the group. To date, Nestle has spent RM93m on Covid-19 related expenses in FY21 and management expects the figure to decrease in FY22.

Forecast. Unchanged.

Maintain SELL with unchanged TP of RM107.00 based on DDM (r: 6.6%, TG: 3.5%) valuation. Despite the expected gradual improvement in sales we opine that the 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%.

Source: Hong Leong Investment Bank Research - 24 Feb 2022