Nestle’s FY21 fell short of expectations dragged by crimped 4QFY21 earnings on account of higher commodity costs. While we expect top-line to be robust on account of the reopening of the economy, we remain cautious on earnings as commodity prices continue to be on uptrend. Slashed our FY22E earning by 21% on account of lower GP margins and Cukai Makmur; hence, TP is reduced to RM132.30. Maintained at MARKET PERFORM due to 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.

Below expectations. 4QFY21 PATAMI of RM110m pushed FY21 PATAMI to RM570m accounting for 87%/93% of both our/market estimates. The negative variance to our/consensus estimates was due to higher commodity prices and opex in 4QFY21 which crimped earnings. A DPS of 102 sen was declared for the quarter pushing DPS for the year to 242 sen (in line).

Margins pressured in the 4Q. YoY, FY21 revenue of RM5.73b remained robust surpassing even its pre-pandemic performance driven by higher domestic (+6.2%) and export sales (+5.0%). The Group’s core F&B business recorded a growth of 6.3% to RM4.77b contributing 91% of top-line. GP margin took a dip by 2ppt predominantly due to downside pressure especially in 4Q. Higher sales coupled with prudent management saw EBITDA remaining stable at 17%. PBT, however, saw a slight uptick (+3.1) on account of higher D&A translating to a similar rise in PATAMI to RM596.60m.

QoQ, top-line continued to be resilient at RM1.46b (+1.9%). However, the quarter saw further downside pressure as GP margin shed 3ppt to 31.5%. EBITDA margin took a further dent shedding 4ppt on account of higher marketing expenses post EMCO and the December floods. PATAMI fell 23.2% to RM110.40m despite ETR shedding 5ppt.

Looking positive but cautious on commodity costs. We are positive of a continued robust top-line ahead as the economy reopens and the nation moves towards an endemic phase. However, global supply chains remained highly disruptive with commodity prices remaining highly volatile with global milk prices expected to stay on an uptrend into 2023. Rising food commodity costs necessitate a corresponding product price increase. However, with its nourishing products representing a large chunk of the consumer staple diet, we believe Nestle would be prudent with any price hikes, of which could be insufficient to offset the elevated commodity costs.

Post results, we revised down our FY22E earnings by 20% to RM472m (RM588m previously on account of Cukai Makmur) as we impute a lower GP margin (-3ppt to 34%). We also introduce our FY23E earnings.

MARKET PERFORM with a revised TP of RM133.90 (from RM138.90) on FY22E PER of 66.4x (previously 55.4x or 0.5SD above mean) with a 1SD attached to the stock’s 5-year mean. We feel this is justified given that the stock has been trading above mean levels (c.1.0SD) due to 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. However, given the risks of volatile commodity prices and uninspiring dividend yields we retained it at MARKET PERFORM.

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

Source: Kenanga Research - 23 Feb 2022