NESTLE’s 1QFY23 results met expectations. YoY, the quarterly top line grew 9% but bottom line contracted 4% as it held back from passing on higher input costs to consumers. While we expect top line to stay robust on normalising demand, we remain cautious on margins as input cost is likely to stay elevated, at least in 1HFY23. Also, consumers may switch to cheaper alternatives should the high inflation persists. We maintain our earnings forecasts, TP of RM121.18 and UNDERPERFORM call.

1QFY23 PATAMI met expectations at 28% each of both our full-year forecast and the full-year consensus estimate. No DPS declared as historically NESTLE does not pay 1Q dividend.

YoY, top line grew 9%, with growth of both domestic and export sales moderating to 10% and 4%, (vs. 1QFY22 of 15% and 25%) respectively. Its F&B sales volume grew by 9% to RM1.53b, maintaining its position as the largest top line contributor at 83%. However, EBITDA fell 5% as margin was eroded by 2 ppts on account of elevated commodities prices and a weaker MYR, though partially mitigated by reduced Covid-19 related expenses. Despite the absence of Cukai Makmur, PATAMI fell 4%.

QoQ, top line grew 12% on account of festivities and the launch of several new offerings such as Kit Kat Pink Ice Cream, an improved Harvest Gourmet (plant-based burger), Starbucks ready-to-drink products and a new edition of Nescafe classic Kopi Kedah (100% Malaysia home-grown coffee beans). Historically, 1Q has always been a strong quarter for NESTLE. EBITDA improved by 33% on operational efficiency gain.

No change to our cautious stance on the following reasons:

i. Despite its products being staple food items, it faces difficulty passing on higher input cost, as shown by its recent experience which eroded margins.

ii. While commodity prices have generally softened; they could potentially rebound due to China’s reopening, the lingering supply-chain disruptions and the prolonged Russia-Ukraine war.

iii. Sustained high inflation may eventually drive consumers to down trade, i.e. opting for cheaper brands or alternatives.

We have 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.

Post results, we make no changes to our FY23F/FY24F earnings. Consequently, our DCF-derived TP remains at RM121.18 (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). 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, (iii) consumers switching to food products of higher quality as purchasing power rises on easing of inflation, and (iv) a swift end to the Russia Ukraine conflict.

Source: Kenanga Research - 26 Apr 2023