While top-line remained robust, margins continued to be challenging under the pandemic amidst volatile commodity prices. Moving ahead, top-line will largely be cushioned by solid in-home consumption, pipeline of new products and brand presence. It is positioned for a recovery in 2HFY21 but with headwinds from challenging margins. TP is raised to RM142.90 as we roll over our valuation base to FY22E. Reiterate MARKET PERFORM as capital upside appears limited, with poor dividend yields.

In line. At RM175m, 1QFY21 CNP is deemed inline, accounting for 28% of both our/market estimates. No dividend declared as expected.

YoY, 1QFY21 top-line of RM1.45b (+1%) continued to be resilient given the prevailing restricted movements during the period. Its core F&B business continued to show robustness recording a 5% growth driven by in-home consumption and good momentum across most brands. Out-of-Home (OOH) activities moderated given the MCOs – impacting the hospitality and restaurant sectors. As expected, profitability was dampened as gross margin fell slightly by 1ppt which we believe was due higher commodity prices. EBITDA fell 8% with margin contracting by 2ppt due to higher Covid-19 related expenses of RM22m. ETR was lower by 4ppt to 20% given the Reinvestment Allowance tax incentive for the Group’s new PBMS (plant-based meal solutions) manufacturing facility which also cushioned the additional Covid-19 expenses. As such CNP of RM175.2m fell 6% on Covid-19 related expenses.

QoQ, the festive season was a boon for Nestle as top-line improved by 6% (but still below pre-pandemic level) mainly due to better sales during the Chinese New Year period. Despite the still challenging environment, EBITDA margin improved by 3ppt to 19% given the absence of large-scale investments and with no change in tax rate, CNP surged 32%.

Top-line to be robust but margins challenging. We expect revenue to continue to be buoyant riding on the efficacy of the vaccine roll-outs. Top-line should be driven by: (i) resilient in-home consumption, (ii) the group’s established brand presence as one of the market leaders, coupled with (iii) its exciting pipeline of new products. Notably, we are also long-term positive due to the expansion of its Maggi noodles production capacity, as well as foray into plant-based meal solutions with distribution into restaurants, retail stores and via on-line which is advancing well at present. However, margins will still be challenged by: (i) prevailing Covid-19 related expenses likely to continue into 1H 2021, (ii) commodity prices looking to be volatile in 2021 but mitigated by a stronger Ringgit), and (iii) higher capex for ESG initiatives and new projects currently being finalized to sustain growth which are likely to be funded by borrowings.

Post results, as results are in line, we made no changes to our FY21E/FY22E earnings.

MARKET PERFORM with a revised TP of RM142.90 (from RM138.60) as we roll over our valuation base to FY22E on PER of 51.8x at 0.5SD above the stock’s 5-year mean. The defensive quality of its business model, solid global franchise and positioning as one of the very few large cap F&B stocks, clear ESG targets as well as being a FBMKLCI index member warrant above-market valuations. Entering the start of a new recovery cycle also warrants the application of above- mean valuation. However, given its limited dividend yield and projected capital upside of +7%, we reiterate MARKET PERFORM.

Risks to our call include: (i) stronger-than-expected sales, and (ii) lower-than-expected operating costs.

Source: Kenanga Research - 28 Apr 2021