NESTLE’s 1QFY22E earning came above expectations on account of better operational efficiency and lower-than-expected impact of Cukai Makmur. While we expect top-line to be robust, courtesy of the economy steering into the endemic phase, we remain cautious as input prices will remain elevated. TP is raised to RM136.50 as we move forward our valuation base to FY23E. It is maintained at MARKET PERFORM on account of elevated input prices and uninspiring dividend yields.

Above expectations. 1QFY22 PATAMI of RM205m accounts for 43%/36% of our/market estimates. The positive deviation from our estimate was due to: (i) higher EBITDA margin (+4ppt), ii) strong top- line growth from both domestic and export markets, and (iii) lower tax rate than expected. As expected, no DPS was declared for the 1st financial quarter.

Operational efficiency. 1QFY22 revenue of RM1.69b (+17%) remained robust given the gradual reopening of business activities benefitting most HORECA channels. Domestic sales saw +15% uptick vs. exports, growing by 25%. The Group’s core F&B business grew 15% to RM1.4b contributing 83% to top-line. GP margin remained solid at 34% (within expectations). EBITDA margin exceeded our expectation, strengthening 4ppt to 20.4% on account of lower opex (- 6%) and other operational execution in its factories, logistics and sales teams. The group also introduced several new products mostly into the food business which we believe helped to improve margins. PATAMI ended 12% higher to RM205m as the impact of Cukai Makmur was lower than we expected, at 29% vs. our estimate of 34%.

QoQ, top-line surged 15% given that more economic activities reopened as travel restrictions were eased which boosted higher demand during the Chinese New Year period. Broadly, margins improved from the previous quarter. PATAMI saw an 86% uptick but would have been higher if not for Cukai Makmur as ETR saw a 5ppt uptick to 29%.

Looking positive but cautious on raw materials costs. We are positive of a continued robust top-line ahead as the nation moves towards an endemic phase. However, global supply chains remained highly disruptive on continued escalation of the Russian-Ukraine war with commodity prices remaining highly volatile with most expected to stay on an uptrend into 2023. Rising food commodity costs will necessitate a corresponding product price increase. However, with its nourishing products range 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 raw materials costs.

Post results, we revised upwards our FY22E earnings by 49% to RM703m on account of: (i) ETR of 29% (34% previously), (ii) EBITDA margins of 20% (from 16% previously), and (iii) domestic/export sales of 7%/10% respectively (previously at 4%/1%). FY23E earnings are revised by 5% on account of improving top-line but we maintain our EBITDA margins of 17%.

Market Perform with a revised TP of RM136.50 (from RM133.90) as we moved our valuation base to FY23E PER of 5-year mean of 50.2x (previously at 66.4x - attaching +1SD to the stock 5-year mean). We feel this is justified given that the stock has been trading between 40- 50x PER as inputs costs remain elevated with inflation costs creeping in. Compounded by uninspiring dividend yields and fully valued, we retain it at MARKET PERFORM.

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

Source: Kenanga Research - 27 Apr 2022