NESTLE guided for sales momentum to be sustained in 2QFY23 underpinned by stable consumer spending pre- and post-Aidilfitri thanks to continued government initiatives to alleviate inflation. It has no immediate plan to raise prices on the back of softening commodity prices. We maintain our earnings forecasts, TP of RM121.18 and UNDERPERFORM call.

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

1. It guided for sales momentum to be sustained in 2QFY23 (on the heels of the seasonally strongest 1Q) underpinned by stable consumer spending in the run-up to the Aidilfitri celebration. Post Raya, with government initiatives still being firmly in place to alleviate cost inflation on the B40 group, consumer spending should not fall off the cliff.

2. NESTLE has no immediate plan to raise prices on the back of softening commodity prices. Its last price adjustment was in Mar 2023. Barring a reversal (due to geopolitical factors or adverse weather conditions), the softer commodity prices will boost its margins in 2H23.

3. To mitigate the still elevated inventory costs, NESTLE switched the geographical locations and suppliers of it imported raw materials which in effect eased logistics costs. NESTLE recently kicked off its NESCAFE Grown Respectfully initiative in Kelantan, demarcating 200 acres in Kelantan for coffee planting which in turn mitigates the elevated costs of using imported coffee bean.

4. NESTLE reiterates its new cycle of investments post-2022 costing RM1b. This capex is expected to be incurred in the period of 2023-2025. These investments are expected to strengthen its launches of new products and innovation to remain relevant in the fast-changing new era with a much shorter product lifecycle.

Forecasts. We maintain our forecasts which have adequately reflected the above mentioned trends. Similarly, we maintain our DCF-derived TP of 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).

No change to our cautious stance due to the following reasons: i) Despite its products being staple food items, it faces difficulty in 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, and iii) Sustained high inflation may eventually drive consumers to down trade, i.e. opting for cheaper brands or alternatives. Aside from concerns over the loss of market share, we believe NESTLE has moral as well as ESG obligations to not excessively raise prices of its staple food products that make up the daily diet of the population. Reiterate UNDERPERFORM.

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 the easing of inflation, and (iv) a swift end to the Russia Ukraine conflict.

Source: Kenanga Research - 28 Apr 2023