NESTLE’s FY22 results met expectations. While expecting its top line to stay robust with the pandemic ebbing, we remain cautious on elevated input cost at least until 1HFY23, suppressing margins. Also, consumers may switch to cheaper alternatives should high inflation persists. We raise our FY23F net profit by 4%, and lift our TP by 5% to RM122.07 (from RM115.65) after rolling forward our valuation base year to FY23F. UNDERPERFORM call is maintained on the concerns mentioned above.

FY22 PATAMI met our forecast and consensus. A final DPS of 122 sen was declared cumulating full-year DPS of 262 sen (99% payout), meeting expectations.

YoY, topline grew 16% as economies reopened, spurring domestic and export sales by 13% and 29%, respectively. Domestic sales were boosted by strong F&B and retail performances. Its F&B business grew 15%, cementing its position as the largest topline contributor at 82%. EBITDA only grew 12% on account of the still elevated commodities prices, and a weaker MYR, partially mitigated by reduced Covid-19 related expenses and improved operational efficiency.

QoQ, 4QFY22 topline fell slightly by 2%, hinting that some of its products have moved beyond the reach of consumers given several price hikes since end-2021. On the flipside, EBITDA improved by 15% as it passed on the elevated input costs to consumers.

Cautious outlook ahead. We remain cautious on NESTLE’s outlook. We see downside risks to its topline growth and margins as consumers down trade, i.e. opting for cheaper brands or alternatives. Further hiking of ASPs could worsen already dampened demand. Gradual price hikes could 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) its high-cost inventories are whittled down by 1HCY23 and it 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 such trends in our forecasts. Aside from concerns over the loss of market shares, 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.

We raise our FY23F earnings by 4% to reflect improved operating efficiency post the pandemic and present our FY24F numbers.

We increase our DCF-derived TP (WACC: 4.9%, TG: 2%) by 5% from RM115.65 to RM122.07 as we roll over our valuation base year to FY23F. There is no adjustment to our TP based on ESG given a a 3-star rating as appraised by us (see page 4). UNDERPERFORM reiterated.

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 food products of higher quality as purchasing power rises on easing inflation.

Source: Kenanga Research - 22 Feb 2023