With 2Q20 likely to feel the full brunt of Covid-19 disruptions, we foresee 2H20 to fare better HoH, as out-of-home channels gradually recover to near optimum capacity. Meantime, Nestlé is allocating a capex of RM280m – its highest in six years, underlining the group’s commitment to prepare for future capacity expansion. Thus, we remain assured of the group’s long-term growth capabilities, backed by its established brand equity. Our DCF-derived TP remains unchanged at RM134 (WACC 6.7%; TG 3.5%). Maintain HOLD.

2020 Capex Allocation of RM280m – Highest in Six Years

The group is set to allocate its highest capex in six years at RM280m – underscoring the group’s commitment to strengthen its future growth capabilities. Based on latest available data, Nestlé remains in a comfortable lead within the packaged food industry, sitting on c.9% market share in the domestic market. Given the scale and its established brand equity, we believe Nestle is well equipped to ride through economic downturns and continue to capture long-term consumption growth opportunities.

Better 2H20 Expected on HORECA Resumption

To recap, 1Q20 results was not spared from Covid-19 disruptions, with out-ofhome business heavily affected. Higher raw-material costs and Covid-19 related expenses further weighed on profitability, leading to a steep 20% yoy earnings decline. Nevertheless, gradual improvement is expected to follow in 2H20, with most HORECA channels gradually operating at near optimum capacity in addition to a strong pipeline of new product launches.

Not Immune to 2020 Meltdown; Projecting 5% 2021 Earnings Growth

Nestlé’s usually defensive businesses are unlikely to be immune from the impact of the pandemic outbreak. We expect 1H20 to succumb to the full brunt of lockdown disruptions before gradual improvement starts kicking in from 2H20 onward. Overall, we estimate bottom-line earnings to decline by -12.6% for 2020, followed by a modest recovery of c.5% in 2021E.

Maintain HOLD

We made no major changes to our earnings forecasts at this juncture. Our DCF-derived TP remains unchanged at RM134.00 (WACC 6.7%; TG 3.5%). Maintain our HOLD rating on Nestle (potential downside of -4.5%). We expect the stock to continue trading at a valuation premium to its other consumer staple peers, in part owing to Nestlé’s i) dominance in the local F&B space, ii) resilient track record and iii) having the perceived scale to better ride through an economic downturn.

Source: Affin Hwang Research - 15 Jul 2020