KEY INVESTMENT HIGHLIGHTS

• 1HFY20 normalised earnings met expectation
• Core earnings for the first six months impacted by Covid- 19
• 2QFY20 normalised profit rose 13.4%yoy to RM155.5m
• Demand expected to improve for the HORECA segment 
• Maintain NEUTRAL stance with an unchanged TP of RM143.90

1HFY20 normalised earnings met expectation. Nestlé (M)’s 1HFY20 normalised earnings of RM341.9m were largely in-line with our full year expectation at 51.9% and 52.7% of consensus’ full year forecast. An interim dividend of 70sen was announced, which was within expectation.

Core earnings for the first six months impacted by Covid-19. In 1HFY20, normalised PAT declined by -8.2%yoy to RM341.9m while revenue slipped by -4.8%yoy to RM2.6b. This was due to the earlier timing of Chinese New Year that resulted in a softer first quarter compared to last year and the adverse impact of Covid-19 that dampened performance in Q2. Local sales had driven revenue for the food and beverage segment (F&B) slightly higher by +0.6%yoy following the success of its marketing campaigns such as the Nestlé Salary For Life Contest. However, this was offset by the weaker performance of its hotel, restaurant and café (HORECA) segment due to the movement control order (MCO) that negatively impacted bottomline.

2QFY20 normalised profit rose 13.4%yoy to RM155.5m as revenue slid by 8.7%yoy to RM1.2b. We have excluded operating expenses of RM50m related to the tightening of standard operating procedures (SOP) to ensure a safe working environment for this quarter and a gain of RM19.7m from the divestment of its Petaling Jaya plant in 2QFY19 from its core net profit. Operating profit for the food and beverages segment dropped by -9.2%yoy to RM157.3m while its nutrition, Nestlé Professional and Nespresso business swung into operating loss of -RM15.5m due to much lower sales. Due to the MCO, operational restrictions for HORECA resulted in lower consumption and sales, which led to the adverse impact on its Nestlé Professional segment. This is cushioned by the in-home consumption driven by sales of products such as MAGGI, NESCAFÉ, MILO and NESCAFÉ ice-cream.

Source: MIDF Research - 26 Aug 2020