NESTLE’s 1HFY23 results met expectations. In spite of a robust 8% top line growth, its bottom line was flattish as it was unable to fully pass on higher input costs. We remain cautious given margin pressures and the possibility of customers switching to cheaper alternatives if the high inflation persists. We maintain our forecasts, TP of RM121.18 and UNDERPERFORM call.

Its 1HFY23 PATAMI met expectations at 53% of both our full-year forecast and the full-year consensus estimate. An interim DPS declared of 70 sen (implying 43% payout) is broadly within our expectation, given that NESTLE usually pays a bumper dividend in the 2H of each financial year.

YoY, its top line expanded 8% mainly driven by sustained double-digit growth (+12%) in the domestic segment. However, this was partially offset by lower export sales due to a high base effect. In particular, the F&B segment sales grew 8% to RM2.98b, thus enabling it to maintain its position as the largest top line contributor (83% of total revenue). However, EBITDA fell 2% as margin slipped 2ppt due to: (i) sustained pressure on commodities prices, especially in 1QFY23, and (ii) a weaker MYR. Also, PBT decline (-5%) was exacerbated by higher funding costs. Nevertheless, the bottom line decline was offset by the absence of Cukai Makmur, which led to the 1% growth in PATAMI.

QoQ, its top line contracted by 5% as 1QFY23 had been boosted by seasonally higher volumes during Chinese New Year. Nevertheless, its 2QFY23 sales were supported by the launch of several new offerings. This includes MAGGI Mi Goreng Laksa Warisan and Pedas Giler, plant-based Crispy Fish-Free Fingers, NESCAFE’s innovative 2-in-1 cold coffee mixes and Lively Tea lemon tea variety. However, its EBITDA contracted by 7% as higher marketing spend more than offset reduced input costs.

Outlook. We remain cautious on NESTLE due to the following reasons:

1. Although NESTLE’s products are staple food items, it faces difficulty in passing on higher input costs. This is evident from its recent experience which eroded margins.

2. While commodity prices have generally softened, they could potentially rebound on China’s reopening, lingering supply-chain disruptions due to the prolonged Russia-Ukraine conflict, and the upcoming period of extreme weather (El Nino).

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

We have incorporated the trends above in our forecasts. In addition to concerns of market share loss, we believe NESTLE has moral as well as ESG obligations not to excessively raise prices of its staple food products that make up the population’s daily dietary intake.

Forecasts. Maintained.

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) a 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 and inflation eases.

Source: Kenanga Research - 28 Jul 2023