1Q22 recorded sales growth on the back of better domestic and export sales. Domestically, this was boosted by the CNY festive season coupled with the exciting product launches. Nestle is also ramping up in product “premiumisation” which typically register a higher price points. Despite that, we gather that the group is experiencing pronounced commodity cost in 1Q22 which are expected to persist. The reduction in Covid-19 related expenses should help ease the pressure on its bottom line. Maintain SELL with unchanged TP RM109.30.

The following are the key takeaways from Nestle’s 1Q22 results briefing:

Elevating demand through product innovations. To recap, 1Q22 recorded top line growth of 16% QoQ/17% YoY on the back of better domestic and export sales. Domestically, this was boosted by the CNY festive season coupled with the exciting product launches. Nestle is also ramping up in product “premiumisation” that includes Musang King stick ice cream and Mochi Boba ice cream. Note that the premium products typically register a higher price points. Additionally, the group is expanding on its healthy product options to cater to the wider segment of the consumer. This includes the roll out of Maggi Nutri-licious Noodles range which has low content of salt and fat vs the original Maggi. The group will continue its effort to understanding consumers better and venturing into new product segments.

Main challenge from elevated commodity price. We gather that the group is experiencing pronounced commodity cost in 1Q22. This remains the main challenge for the group signalling from the unwavering increase across the board. Despite the initiatives on internal savings and hedging policy, the prolonged volatility of commodity prices prompted Nestle to further increase shelf prices in March 2022 across different segment of its products. Without any quantum given, management assured that the price hike put in place has been moderate and the group would still have to absorb some of the cost pressure. This is to ensure that Nestle products remain competitive in the market. Given the challenging economic environment, we expect demand to be affected as price sensitive consumers will be motivated to switch to more affordable options in the near term.

Expect reduction in Covid-19 related expense s. The group will continue to prioritize safety and supply continuity by adhering to strict SOPs. With 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. Management notes that the cost incurred would be significantly less than the FY21 total amount of RM93m.

Investing for future growth. Nestle has budgeted RM280m-300m capex in FY22 (FY21: RM275m) to ramp up production capacities and efficiency upgrades in several factories. The capex allocation remains intact, albeit with slow deployment (c.9% utilized as at March 2022) as the group are focusing on increasing its buffer inventory as a hedging strategy.

Forecast. Unchanged.

Maintain SELL with unchanged TP of RM109.30 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 - 28 Apr 2022