To recap, FY22 recorded top line growth of 16% YoY on the back of better domestic and export sales. The main driver from the rebound was attributable to the OOH and mobility channels. Observing from the early days of FY23, management guided that the consumer sentiment remains rationally strong. Despite that, management foresees commodity prices to stay volatile albeit at a manageable level and reiterating that they are still operating in a tough environment. The group does not discount the probability of another price hike on the card for FY23. On capex guidance, Nestle has allocated RM1bn capex for the next 3 years to expand its industrial footprint. We applaud the group’s commitment in eliminating the use of virgin plastics, with the adoption of recycled-PET and paper. Maintain HOLD with unchanged TP of RM121.60.

Below Are Key Takeaways From Nestle’s Analysts Briefing:

Consumer sentiment remains rationally strong. To recap, FY22 recorded top line growth of 16% YoY 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 with main driver attributable to the OOH and mobility channels. Specifically, the ready-to-drink canned/bottles products showed encouraging demand coming out of the lockdown. Observing from the early days of FY23, management reiterated that the consumer sentiment remains rationally strong especially taking cue from the sales during CNY celebration in Jan 2023.

Volatility in commodity is expected to be manageable. Despite the recent price correction, management foresees commodity prices to stay volatile albeit at a manageable level and reiterating that they are still operating in a tough environment. The initiatives on internal savings, hedging policy, and price hike have borne fruit with a bounce from the last quarter’s lowest GP margin recorded (4Q22: 30.9% vs 3Q22: 27.3%). Judging from the current landscape, management does not discount the probability of another price hike on the card for FY23. However the group assured that the price hike put in place will be at a smaller quantum as compared to what was previously implemented.

Investing for growth. The group has allocated RM1bn capex for the next 3 years to expand its industrial footprint. This is mainly to increase its existing capacity to propel the group forward for growth which include investment in new technology, digitalisation and sustainability.

Continuing on sustainability journey. Nestle pioneered the adoption of renewable electricity through the Green Electricity Tariff framework, that reduced 300k tonnes of CO2 in FY22. In sustainable packaging, Nestle took steps to eliminate the use of virgin plastics, with the adoption of recycled-PET for all range of Nescafé and Milo RTD bottles as well as the adoption of paper to replace plastic in Maggi bowls and growing number of ice cream product. Other initiatives included the ongoing community door to-door collection and recycling programme, KitaR recycling programme, and Project RELeaf tree planting programme. The group also contributed about RM15m in support of flood relief efforts, charity homes and food aid to needy communities.

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 47.9x FY23 PE in comparison to its holding co (Switzerland) at 21.6x and sister-co (Nigeria) 19.8x, 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 - 23 Feb 2023