NESTLE's 9MFY23 results met expectations. Its 9MFY23 net profit grew 5% — a 7% expansion in its top line — partially offset by cost pressures. We are concerned over its inability to raise prices and potential downtrading by its customers on sustained high inflation. We tweak our FY23F net profit forecast lower by 2% but maintain our TP of RM115.00 and UNDERPERFORM call.

NESTLE’s 9MFY23 net profit came in largely within expectations at 72% of both ours and consensus full-year estimate. An interim DPS of 70 sen was declared (ex-date 17 November), bringing its YTD dividend to 140 sen, in line with our expectation. For the full financial year, we expect the group to declare a total of 290 sen, implying a 98% dividend payout ratio.

YoY, NESTLE’s top line expanded 7% in 9MFY23, thanks to doubledigit growth in domestic sales driven by robust demand. The growth, however, was partially tempered by lower export sales from a high-base effect. Its PBT inched up by only 4%, hampered by higher input costs and operating expenses, partially mitigated by its continued efforts to improve efficiency, cut cost, and better manage the volatile commodity prices and a weaker MYR. Meanwhile, its net profit was enhanced by 5%, thanks to the absence of the one-off Cukai Makmur.

QoQ, its top line improved by a marginal 1% mainly due to solid domestic sales on the back of sustained consumer demand. The group’s PBT, however, contracted by 15% as a result of lower gross profit margin coupled with higher operating expenses, particularly marketing cost where several brand events and activities (such as MILO Malaysia Breakfast Day and NESTLE OMEGA PLUS Walk A Million Miles campaign) were launched during the period. Notably, its effective taxation rate was higher at 33.2%, which was more than the statutory tax rate of 24%, primarily due to non-tax deductible impairment losses and insufficient provision for prior tax expenses.

Forecasts. We tweak our FY23F net profit forecast lower but maintain that of FY24F.

Our DCF-derived TP remains at RM115.00 (based on WACC of 5.2% 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).

Outlook. We remain cautious on the company’s outlook. The absence of a significant recovery in margins suggests that it is still struggling to pass on higher input costs. Despite absorbing the higher input costs (by not significantly raising prices), there is still a risk that its customers may downtrade, i.e. switch to cheaper alternatives, amidst sustained high inflation. Certain products, like cereal, milk and evaporated milk, could be more vulnerable than the others given their low brand equity. Nonetheless, we take comfort in NESTLE’s wide range and variety of staple food products, which could cushion the impact of downtrading by customers, if it happens. Maintain UNDERPERFORM.

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 or inflation eases.

Source: Kenanga Research - 27 Oct 2023