• 6M20 core net profit of RM289.7m (-23.7% yoy) was broadly within our and consensus expectations, accounting for 49% and 44% of the respective forecasts.
• Nestle announced its intention to invest in a pioneering facility for plantbased meal solutions at its Shah Alam factory, the first in Southeast Asia and part of its RM280m capex plan this year.
• No changes to our earnings estimates at this juncture. Maintain HOLD with an unchanged DCF-derived 12-month TP of RM134.00.

2Q20: Within Expectations

Nestle posted a 6M20 revenue of RM2.65bn (-4.8% yoy), on the back of lower sales on out-of-home channels but this was partially cushioned by stronger contribution from inhome consumption. The EBIT margin declined to 15.1% (-3.5ppt) partly exacerbated by additional Covid-19-related costs (such as work safety and support for front-line workers) amounting to c.RM50m. In tandem, core net profit came in at RM289.7m (-23.7% yoy). 1H is typically stronger seasonally, but we are likely to see a HoH recovery in 2H20 from Covid-19 disruptions, so the results are within our and consensus expectations (49% and 44% of the respective 2020 forecasts). DPS of 70 sen was proposed for the quarter (2Q29: 70sen).

Continual Innovative Product Roll-out to Support Future Growth

Revenue and core net profit fell sequentially to RM1.2bn (-15%) and RM99.7m (-48%) respectively owing to the aforementioned factors. We foresee the continual roll-out of new products (in addition to launches in 2Q) supporting growth in the subsequent quarters, building on the expected progressive recovery post-MCO. Elsewhere, as part of its RM280m capex plan for 2020, the group also announced its intention to invest in a pioneering facility for plant-based meal solutions at its Shah Alam factory, which we believe should further improve longer-term growth prospects.

Maintain HOLD

We made no changes to our earnings forecasts, and maintain our HOLD rating with an unchanged DCF-derived TP of RM134.00 (WACC: 6.7% and TG: 3.5%). We expect the stock to continue trading at a valuation premium to other consumer peers, in view of its: i) dominance in the F&B space, ii) relatively resilient business against an economic downturn, and iii) sustainable long-term growth prospects. Upside/downside risks: (i) earlier-/later-than-expected containment of Covid-19, (ii) spike/fall in consumer sentiment, and (iii) a sharp decline/increase in raw material costs.

Source: Affin Hwang Research - 26 Aug 2020