9MFY21 top-line continued to be robust with 3QFY21 earnings surpassing pre-pandemic quarterly results – showing resiliency despite the restrictions in place. Margins showed improvement on account of fewer marketing promotions, offset by elevated commodity prices and Covid-19 expenses. Moving forward, we raise FY21E earnings by 3% slightly but slashed FY22E earnings by 10% on account of the one-off Cukai Makmur. TP is reduced to RM138.90 based on FY22E PER of 55x (5-year mean with a 0.5SD attached). Maintain MARKET PERFORM.

In line. 3QFY21 PATAMI of RM144m pushed 9MFY21 PATAMI to RM459m accounting for 72%/75% of both our/market estimates. DPS of 70.0 sen implies a payout of 71%, also within expectations.

YoY, 9MFY21 top-line of RM4.27b (+6%) continued to be resilient surpassing pre-pandemic performance. Its core F&B business maintained its resiliency, recording a 6% growth, driven by domestic sales (80% of revenue) at the same growth rate. The domestic sales were likely driven by in-home consumption and robust momentum across most brands as Out-of-Home (OOH) activities were likely impacted by the EMCO in the third quarter. GP margin took a slight dip by 1ppt to 35% on account of the elevated commodity prices with EBIT margins improving slightly by 30bps, given the improvement in sales and lower marketing expenses offset by Covid-19 related expenses of RM65m. With ETR stable at 24%, PATAMI improved by 9% to RM459m.

QoQ, coming from a lower base, top-line rebounded 4% to RM1.44b. F&B business continued to be resilient, rebounding 6%. EBIT margin firmed up by 160bps to 15%, due to better sales and lower marketing expenses; but dented by higher Covid-19 related expenses. The quarter also saw the introduction of new products such as NESCAFÉ Ready-To-Drink Limited Editions (Gula Melaka, Pandan and Ros Bandung), NESCAFÉ Ice Caffé Latte, KIT KAT Chunky Raisin & Cookie and NESTLÉ Onde Onde Ice Cream.

Looking positive ahead. We expect the 4Q to surpass previous quarters, riding on the easing of restrictions and reopening of the economy. Top-line should be driven by: (i) resilient in-home consumption, (ii) the group’s established brand presence as one of the market leaders, (iii) its exciting pipeline of new products and better contribution from its Out-of-Home (OOH) activities given the reopening of the economy.

Post results, we raised our FY21E estimate by 3% to RM653m on account of the positive domestic sales but slashed FY22E earnings by 10% to RM588m on account of the prosperity tax.

MARKET PERFORM with a revised TP of RM138.90 (from RM143.60) on a FY22E PER of 55.4x on the stock’s 5-year mean (with a 0.5SD attached). Despite the prosperity tax, the defensive quality of its business model, economic recovery, clear ESG targets, solid global franchise and positioning as one of the very few large cap F&B stocks, as well as being a FBMKLCI index member are merits that justify the above mean valuation. Maintained at MARKET PERFORM.

Risks to our call include: (i) elevated commodity prices, (ii) unfavourable Ringgit.

Source: Kenanga Research - 3 Nov 2021