• Maintain NEUTRAL, with new TP of MR141.00 from MYR138.00, 6% upside. 1Q22 results beat expectations on sharp topline growth and milder- than-expected Cukai Makmur impact. Nestle is well positioned to capture the post-reopening recovery in spending considering its brand equity and effective marketing execution, but we believe input costs will remain a key risk. Essentially, the solid underlying fundamentals and defensive attribute will continue to translate into resilient earnings growth and sustainable dividend payout, thereby supporting the rich valuation.

• 1Q22 results surprised on the upside. Core net profit of MYR205m (+17% YoY) accounted for 34% and 36% of our and Street forecasts on stronger-than-expected sales growth and milder-than-expected Cukai Makmur impact. Post-results, we raise FY22F-24F earnings by 2-6% and correspondingly our DCF-derived TP rises to MYR141 (inclusive of an 8% ESG premium). The new TP implies 48x FY22F P/E (excluding Cukai Makmur impact), close to +0.5SD from its 5-year mean.

• Results review. YoY, 1Q22 sales surged 17% to an all-time high level of MYR1.7bn, with both domestic (+15%) and export (+25%) segments benefiting from the broader economy reopening. Meanwhile, elevated commodity prices continue to pressure GPM, which slipped 1.8ppts to 34%. However, the sharp topline growth and lower pandemic-related expenses were strong enough to drive a 31% PBT growth on the back of 1.8ppts margin expansion. QoQ, 1Q22 sales were 16% higher driven by the Lunar New Year demand. This, together with the swing in marketing expenses and GPM recovery, propelled an 81% QoQ surge in 1Q22 net profit.

• Capitalising on the more conducive business environment. Looking forward, we foresee the strong earnings momentum to sustain as Nestle is able to capture the post-reopening recovery in spending thanks to its innovative new product launches and effective marketing initiatives to engage with consumers. The market environment of both local and export segments should further improve, premised on the normalisation of economic activities facilitated by the high vaccination rates and containment of the pandemic. Meanwhile, we expect Nestle to continue to enhance its operational efficiency to mitigate the higher input costs impact and price adjustments may be implemented if the costs pressure persists.

• Downside risks include a sharp rise in input costs and a significant loss in market share. The converse represents the upside risks.

Source: RHB Research - 27 Apr 2022