As the largest local food and beverage manufacturer, NESTLE has putitself atthe forefront of sustainability efforts with their vision of Creating Shared Value (CSV), going into greater lengths than what corporate social responsibility (CSR) entails.To dive deeper into the ongoing efforts by NESTLE, we held an open discussion with the Group CFO, Head of Corporate Affairs and its Sustainability team. Overall, we are impressed by the wide spectrum of initiatives instituted by the group as they uplift communities and educate sustainable practices whilst also add value to their supply chain. These include developing new packaging methods to achieve a high rate of recyclability and processinginto reusable materials, as well as engaging with contract farmers to enable crop growth sustainably. We found that NESTLE has passionately embraced its roles and duties in upholding sustainability, which is paramount given its high public influence and equity as a reputable food company. Given itsextensive range of product line-ups, it is estimated that NESTLE has a 16% market value share in the entire food business in the country. For now, though we have an UNDERPERFORM call on NESTLE (TP: RM129.30) as valuations might be presently overdemanding,we believe this should not undermine the added value which the group has been working to bring with its CSV initiatives.

For the common good. NESTLE embraces the concept of CSV which looks beyond the conventional needs of CSR and duty. Essentially, the group strives to maximise both fundamental values and also long-term intrinsic values which might be of material impact eventually. The guided principles are realised with active engagement with stakeholders, corporate partnerships and engagement with local communities to identify important addressable areas which NESTLE could have an influence on. The pursuant investment of resources and talent aims to instil joint value creation which could result in deeply rooted environmental and economic benefits.

Sustainability is not necessarily a trade-off for quality. Post session with NESTLE, we take away that efforts tobe sustainable does not need to come at a compromise for quality, nor should quality be a deterrent for seeking more sustainable means. We find greater appreciation for companies that are able to implement sustainability as a part of their ongoing business, though not to underplay other efforts which are more supplementary (i.e. physical donations). Further,NESTLE’s extensive sustainability reporting in its annual Nestlé in Society report, which is in accordance with the GRI standards with performance indicators aids readers to quantify and conclude on the group’s efforts. The rest of the report highlights key discussion areas of CSV which are of interest to us and believe could serve as a guiding precedent to how other corporations could augment into their practices.Ultimately, while sustainability is often viewed as a discretionary responsibility, we believe that it is seeing sprouting recognition and acceptance in the investment community as a key priority. In other words, those who can, should.

For now,we have an UNDERPERFORM call on NESTLE with a TP of RM129.30(based on a 46.0x FY21E PER valuation). Arguably, the stock’s high valuations may seem overly demanding to some, especially since its highly saturated presence in many food spaces might be an indication of lesser growth opportunities. That said, we hold the key initiatives highlighted in this report (i.e. plastic neutrality) in high regard as they might serve as a future cornerstone for other large players in the F&B industry to step up to. Should this pan out in accordance with NESTLE’s pipeline, it is possible that investors could appreciate the stock more for its sustainable efforts and the value that it brings to the society. We will continue to monitor NESTLE’s progress in its sustainability programs closely

Source: Kenanga Research - 3 Nov 2020