On the heels of NESTLE’s post-results briefing, we remain cautious on its near-term prospects. While we expect a robust topline on the back of the reopening of the economy, we are still concerned over elevated input prices that will suppress margins while product price hikes may prompt consumers to switch to cheaper alternatives. We maintain our forecasts, TP of RM115.65 and UNDERPERFORM call.

We came away from NESTLE’s post-results briefing yesterday feeling mixed. The key takeaways are as follows:

1. It said that consumer spending momentum has sustained as the economy moves into the endemic phase. While NESTLE has gradually raised prices since end-2021 to partially pass on the higher input costs, this has not impacted sales, partly also due to highly effective marketing and promotional initiatives (including those anchored by foreign celebrities).

2. The company believes the value proposition of its products to consumers lies in: (i) the flavour being tweaked to cater to local taste buds, (ii) superior quality, and (iii) high nutritional value. This has led to market share gains in most segments since the start of the endemic phase.

3. NESTLE is maintaining its strategy of not fully passing on the higher input costs to consumers. Apart from concerns over the loss of market share, we believe NESTLE has moral as well as ESG obligations not to excessively raise prices of its staple food products that make up the daily diet of the population.

4. It is hopeful that the gradual price hikes will eventually come to an end by 2QFY23 as: (i) it is somewhat shielded from the strengthening USD against the MYR given its strategy of hedging forward its USD requirements for 3-5 months since 2HCY22, and on expectations of a more favourable spot exchange rates by 2QCY23, (ii) it should deplete its high-cost input inventory by 1HCY23 and start to enjoy the softening food commodity prices, and (iii) global supply-chain disruptions (that has been a driver of cost inflation) ease. We have more or less reflected these trends in our forecasts.

We reiterate our cautious outlook ahead. We see downside risks to its topline growth and margins as consumers down trade, i.e. opting for cheaper brands or alternatives, while cost pressures remain with extended supply chain disruptions as well as the prolonged Russia-Ukraine war. While NESTLE expects the gradual price hikes to come to an end by 2QCY23, we see risks of further price increase if inflation persists. Meanwhile, commodities prices have eased in recent weeks which should alleviate margin pressures in FY23 with further softening in 2HCY23 but unlikely to retrace to their pre-Covid levels.

Forecasts and recommendation. We maintain our forecasts and DCF-derived TP of RM115.65 based on WACC of 4.9% and TG of 2%. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Maintained at UNDERPERFORM.

Risks to our call include: (i) significant fall in commodities prices, (ii) a stronger MYR resulting in lower cost of imported raw materials, and (iii) consumers switching to premium food products of higher quality as their spending power rises on easing inflation.

Source: Kenanga Research - 28 Oct 2022