2Q22 recorded top line growth on the back of better domestic and export sales. Domestically, this was boosted by the continuous rise in OOH with the resumption of travelling activities coupled with the exciting product launches. Despite the growth recorded, myriad of challenges remain present on the back of elevated commodities, volatile supply of harvest, rising inflation, Ukraine - Russia war and weakening RM. The reduction in Covid-19 related expenses should help to ease the pre ssure on its bottom line. Maintain HOLD with unchanged TP RM121.60.

Below Are the Key Takeaways From Nestle’s 2Q22 Results Briefing:

Robust product demand. To recap, 2Q22 recorded top line growth of 19% YoY/18% YTD on the back of better domestic and export sales. Domestically, this was boosted by the continuous rise in out-of-home (OOH) with the resumption of travelling activities coupled with the exciting product launches. This includes the introduction of Harvest Gourmet plant-based nugget, dairy-free coffee capsules, Nescafe Dolce Gusto Almond/Coconut Flat White and Nestlé Omega Plus dark chocolate milk powder. Some of these products are categorized under the premium products such as the Nescafé Gold Cappuccino Ice Cream and the introduction of a premium chocolate block range under Nestlé Les Recettes De L'atelier Chocolate. Note that the premium products typically register higher price points. The group will continue its effort to understand consumers better and venturing into new product segments.

Catalyst muted by challenges ahead. Management shared that consumer demand have been robust domestically on the back of full reopening coupled with the minimum wage increase. Despite that, we remain cautious on the various headwinds especially with the volatile supply of harvest due to the drought and climate change. Additionally, challenges remain with rising inflation, Ukraine-Russia war and the weakening RM that further aggravated the situation.

Elevated commodity price. We gathered that the group is experiencing pronounced commodity cost in 1H22. 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 prompt ed Nestle to further increase shelf prices 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’s products remain competitive in the market. We note that the reduction in Covid-19 related expenses should help ease the pressure on its bottom line.

Staying ahead in ESG initiatives. Nestle continues to accelerate its ESG agenda which includes expanding its voluntary Extended Producer Responsibility (EPR) initiatives, such as our Collection and Recycling Program. At this juncture, the group are on track to achieve its target of collecting 6,000 tonnes of post-consumer packaging by end-2022, of which 3,000 tonnes will be plastics.

Forecast. Unchanged.

Maintain HOLD with unchanged TP of RM121.60 based on DDM (r: 6.6%, TG: 3.5%) valuation. While valuation is 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 - 1 Aug 2022