KEY INVESTMENT HIGHLIGHTS

• 9MFY20 core net income (CNI) within expectation

• CNI for the nine months period declined by 10.2%yoy to RM472.6 as revenue slipped 3.5%yoy to RM4.0b

• 3QFY20 CNI fell 15.1%yoy to RM130.7m

• HORECA segment still lag although it has improved compared to 2Q

• Maintain NEUTRAL with an unchanged TP of RM143.90

9MFY20 core net income (CNI) within expectation. Nestlé (M)’s 9MFY20 CNI of RM472.6m met our expectation, making up 71.7% or our expectation and 72.8% of consensus full year estimates. An interim dividend of 70sen was announced, which is also within estimates.

CNI for the nine months period declined by -10.2%yoy to RM472.6 as revenue slipped -3.5%yoy to RM4.0b. The softer performance during the period compared to the previous year is largely attributed to the Covid-19 pandemic which had dampened demand the disrupted the hotel, restaurant and café (HORECA) segment. During the period, operating costs has also increased due to the more stringent standard operating procedures (SOP) to ensure a safe working environment.

3QFY20 CNI fell -15.1%yoy to RM130.7m as revenue stayed largely unchanged at RM1.4b. The lower quarterly net profit can be attributed to the gross profit margin that compressed by 0.7ppt and operating profit margin that compressed by 1.4ppt. This was mainly due to higher operating costs in preserving its workplace safety and the workplace segregation. Meanwhile, the company continues to launch new products during the quarter. They include: MILO Activ-Go Plus Fibre, NESCAFÉ Latte Milk Tea, NESCAFÉ Ice Cappuccino, NESTLÉ ICE CREAM (Musang King, LA CREMERIA Peanut Butter), MAGGI (MAGGI FUSIAN Bowl range) and NESTUM (Purple Sweet Potato and Taro).

HORECA segment still lag although it has improved compared to 2Q. NESTLÉ PROFESSIONAL business division, which supplies to the HORECA segment, has been hard hit due to the movement control order (MCO). The segment has recovered with the Recovery MCO, which started since June but it is still weaker than the performance a year ago. We expect this segment to remain subdue as the conditional MCO in the Klang Valley and other affected areas since mid-October and is expected to last until December. That said, we believe that demand will shift to the food and beverage segment (F&B) as more people work from home and stay at home. We think that Nestlé will be ready to capitalise on this trend that it had already put in place digital marketing strategies and distribution channels to support the change in consumer habits.

Maintain NEUTRAL with an unchanged TP of RM143.90. We make no changes to our earnings estimates as the results are in-line. We maintain our DDM-derived valuation as the company is committed in paying out 95% of its net profit as dividend and the dividends announced so far are also within expectation. We believe that demand for Nestlé’s products will remain resilient as it is a well-known and trustable brand. However, valuation for the stock remains rich and hence we maintain our NEUTRAL recommendation.

Source: MIDF Research - 11 Nov 2020