Nestle registered 1H22 core PAT of RM391.8m (YoY: +25.4%) which is above ours and consensus, making up 71% and 65% of full year expectations, respectively. Overall top line increased on the back of robust domestic and export sales. Despite that we remain vigilant on multiple headwinds that might dent the bottom line. We lift our FY22/23/24 earnings forecasts by 17%/12%/11%. Upgrade to HOLD with a higher TP of RM121.60 (from RM109.30) based on unchanged DDM parameters (r: 6.6%, TG: 3.5%).

Beat expectations. Nestle registered 2Q22 core PAT of RM184.6m (QoQ: -11.0%, YoY: +37.2%) which brought 1H22’s sum to RM391.8m (YoY: +25.4%). This is above both ours and consensus, making up 71% and 65% of full year expectations, respectively. The positive results surprise was on the back of better-than-expected top line. 1H22 core PAT was arrived at after adjusting for RM17.0m forex losses.

Dividend. Declared DPS of 70 sen/share going ex on 8 Sep 2022 (2Q21: 70 sen/share). 1H22 DPS: 70 sen (1H21: 70 sen).

QoQ. Sales dipped by -3.2% to RM1.6bn due to high base effect from the CNY festive season in 1Q22. Core PAT declined further by -11.0% to RM184.6m on the back of (i) lower sales; and (ii) EBITDA margin contraction by 2.3ppt with rising commodity prices.

YoY. Top line rose by 18.8% on the back of robust domestic and export sales that registered 12.5% and 48.1% increase, respectively. Encouragingly, out-of-home (OOH) channels continue its recovery post lockdown and travel restrictions. Bottom line staged a 37.2% increment on the back of top line acceleration coupled with EBITDA margin improvement by 1.4ppt.

YTD. Revenue grew by 17.8% aided by +13.7% domestic and +36.1% export sale improvement. This was thanks to the gradual recovery in core F&B and OOH as movement restrictions were lifted. Subsequently, core PAT rose by 25.4% on the back of higher revenue coupled with expansion in EBITDA margin by +1.4ppt on the back of lower Covid-19 related expenses.

Outlook. We are delighted to witness recovery in the HORECA channel with the uplift of restrictions and we opine the good momentum to sustain in the country’s endemic phase. Additionally, the reduction in Covid-19 related expenses also helped to ease pressure on its bottom line in light with the rising raw material prices. Despite that, management flagged that the challenges remain with elevated commodities, rising inflation, Ukraine-Russia war and the weakening MYR that further aggravated the situation. Overall, we note that off-trade channels were boosted by the launch of new products which include introduction of Harvest Gourmet plant-based nugget, dairy free coffee capsules, Nescafe Dolce Gusto Almond Flat White and Coconut Flat White, Nestlé Omega Plus dark chocolate milk powder, Nescafé Gold Cappuccino Ice Cream and the introduction of a premium chocolate block range under Nestlé Les Recettes De L'atelier Chocolate.

Forecast. We increase our FY22/23/24 earnings forecasts by 17%/12%/11% to account for the deviation mentioned above.

Upgrade to HOLD (from Sell) with a higher TP of RM121.60 (from RM109.30) based on unchanged DDM (r: 6.6%, TG: 3.5%). While valuations are expensive at 48.8x FY22 PE in comparison to its holding-co (Switzerland) at 24.7x and sister-co (Nigeria) 21.9x, the positive results surprise should support this premium.

Source: Hong Leong Investment Bank Research - 29 Jul 2022