Despite the robust top line, we are cognizant with the elevated commodities that continue to dampen the bottom line. Note that 3Q22 recorded the lowest ever GP margin of 27% (vs the average of 30-35%). Despite the recent price correction, management foresee commodity prices to stay elevated in the near future. Nestle has been reformulating its products to bring down the sugar content to be within the non-taxable limit following the sugar tax implementation in Nov 2022. We applaud the group commitment in expanding further the use of environmentally-friendly packaging with the introduction of recycled-PET bottles and replacing shrink wrap with 100% sustainably sourced recyclable paper. Maintain HOLD with unchanged TP RM121.60.

We Came Away From Nestle’s 3Q22 Results Briefing With Following Takeaways:

Consumer momentum remains encouraging. To recap, 3Q22 recorded top line growth of 17.0% YoY/17.5% YTD on the back of better domestic and export sales. Domestically, this was thanks to the solid growth in both the core F&B and out-of-home (OOH) segments which continued to benefit from the strong recovery. The group is steadfast in capturing the recovery by leveraging all opportunities to increase the reach of its core products while continuing to lead in product innovation. Some of the new product launches this quarter include the Harvest Gourmet plant-based nuggets, Nestle Omega plus dark chocolate milk powder, Maggi Nutri -licious noodles range, the introduction of premium chocolate block range under Nestle Les Recettes De L'atelier chocolate and Kitkat bar dark with Southern Australian oranges.

Commodity to stay elevated in the near future. Despite the recent price correction, management foresee commodity prices to stay elevated in the near future and reiterating that they are still operating in a tough environment. Despite the initiatives on internal savings and hedging policy, the prolonged volatility of commodity prices causes the GP margin to contract to the lowest level of 27% (vs the average of 30%- 35%). Even with the implementation of several rounds of price increase, 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.

Provision and write off of inventories. We understand that the 9M22 provision and write off of inventories amounted to RM38.4m was for the raw material and packaging. This was due to the reformulation for some of its products following the implementation of sugar tax that will take effect in Nov 2022. Recall that in Budget 2022 the government propose for the imposition of excise duty on sugary beverage to include pre-mixed drink products in the form of chocolate, cocoa, malt, coffee and tea. Nestle has been reformulating its products to bring down the sugar content to be within the non-taxable limit. This is in line with the group’s commitment to produce healthier and more nutritious products that cater to local taste buds.

Continuing on sustainability journey. Nestle recently introduced recycled-PET bottles for some of its products packaging. Despite the higher cost of recycled-PET (vs regular plastic bottles), the group is committed in expanding further the use of environmentally-friendly packaging. Nestle is the first in Malaysia to use high-quality recycled plastic resin for its Ready-to-Drink (RTD) products in plastic bottles format. The group has also eliminated the single-use plastic shrink wrap for its Milo UHT 125ml products, replacing it with 100% sustainably sourced recyclable paper, and is working to extend this innovation to the rest of the UHT range.

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 48.3x FY22 PE in comparison to its holdingco (Switzerland) at 22.6x and sister-co (Nigeria) 25.6x, we opine Nestle’s current risk reward profile to be fair coupled with its status as a key consumer staple.

Source: Hong Leong Investment Bank Research - 28 Oct 2022