• 1Q21 core net profit of RM175.2m (-6.1% yoy) came in broadly within ours and consensus expectations
• Subsequent quarters should likely benefit from sustained innovative launches but we remain cognisant of challenges in the form of higher raw-material price volatility as well as freight costs, which may hamper margins in the near term
• No change to our earnings estimates. Maintain HOLD but with a higher DCF derived TP of RM140.20, post rolling forward our base year to 2022E

1Q21 Core Net Profit at RM175.2m (-6.1% Yoy)

Nestle posted a 1Q21 revenue of RM1.45bn (+1.0% yoy), backed by robust in-home consumption but moderated by out-of-home activities which continue to be hampered by strict lockdown measures. EBITDA margin was softer at 19.0% (-1.8ppt) in part due to lower GP margin of 35.8% (1Q20: 36.8%) likely on unfavourable product mix as well as Covid-19 related costs which amounted to RM22m. Core net profit for the quarter came in at RM175.2m (-6.1% yoy), which we deem broadly in-line with ours (29%) and consensus (28%) expectations given the seasonal Lunar New Year festive sales.

Signs of Recovery, Albeit at a Gradual Pace

Sequentially, revenue and core net profit registered a 5.8% and 25.6% growth respectively, mainly owing to seasonally higher sales volume. During 1Q21, innovative offerings continued to be introduced, amongst others Maggi Recipe mixes and Kit Kat Gold. The Plant Based Meals Solutions factory in Shah Alam was also up and running with initial distribution to selected restaurant channels, followed by gradual roll-out into retail stores and e-commerce in 2Q21. Elsewhere, Nestle also underscored its commitment with Malaysia by allocating another record capex year of RM300m (2020: RM295m) to ramp up production capacity and upgrade machineries.

Maintain HOLD

No change to our earnings estimates. We roll forward our DCF base year to 2022E, resulting in a higher TP of RM140.20 (WACC: 6.7%; TG: 3.5%). While we are encouraged by the gradual steps towards recovery amidst vaccine roll-outs, we remain cognisant of the challenging operating environment posted by higher freight costs as well as commodity price volatility which may hamper margins as it kicks in over the subsequent quarters. Maintain HOLD. Up/downside risks: (i) earlier/later-than-expected herd immunisation, (ii) spike/fall in consumer sentiment, and (iii) sharp fall/spike in raw material costs.

Source: Affin Hwang Research - 28 Apr 2021