• 2020 core net profit of RM560.4m (-15.9% yoy) came in within our and consensus expectations
• Sequential sales were partially hampered by CMCO, but 4Q20 core net profit of RM139.5m ticked up +3.4% yoy, aided by lower effective tax rate
• No change to our earnings estimates. Maintain HOLD with an unchanged DCFderived TP of RM134.00

2020 Core Profit Contracts -15.9% Yoy on Pandemic Impact

Nestle posted a lower 2020 revenue of RM5.4bn (-1.9% yoy), attributable to the impact of lockdown measures concentrated in 1H20. To note, its core F&B business grew +2.3% yoy to RM4.5bn, on the back of engaging brand campaigns, but that was negated by a subdued performance in its “Others” segment (i.e., Nestle Professional, NESPRESSO) which contracted -18% to RM920m. EBITDA margin was softer at 17.4% (-2 ppt) on: i) lower GP margin of 36.3% (2019: 37.6%) likely on unfavourable product mix and ii) additional Covid-19 related costs to preserve operational continuity. YTD core net profit contracted by -15.9% to RM560.4m, which came in-line with our and consensus expectations. DPS of 92 sen was declared for the quarter, bringing 2020 DPS to 232 sen (2019: 280 sen) – within expectations.

Renewed Lockdowns Dampen Sequential Recovery Momentum

Sequentially, revenue was marginally lower at RM1.37bn (-1.3%) in part due to the previous high base as pent-up demand ensued post easing of restrictions in 3Q20. Nonetheless, core profit trickled up by +3.4% to RM139.5m, largely aided by a lower effective tax rate during the quarter. Looking ahead, the renewed MCO will likely hamper the sales recovery momentum, especially for OOH channels. Adding to the woes, the rebound in key commodity prices may also weigh on margins over the near term. That said, the group continues to strive for innovation, with the latest being the impending launch of its new plant-based meal solutions manufacturing facility in April 2021.

Maintain HOLD

No change to our earnings estimates. We introduce 2023E EPS of 296 sen (+3% yoy). Our DCF-derived TP remains unchanged at RM134.00 (WACC 6.7%; TG 3.5%). Maintain HOLD. Upside/downside risks: (i) earlier/later-than-expected discovery of an effective Covid-19 vaccine that renders herd immunisation, (ii) spike/fall in consumer sentiment, (iii) sharp fall/spike in raw-material costs.

Source: Affin Hwang Research - 24 Feb 2021