• Maintain NEUTRAL and MYR141 TP, 4% upside and 2% FY22F yield. Nestle’s 1H22 results met our expectations but beat consensus’, thanks to continued topline recovery and prudent cost controls. External headwinds may persist into 2H22F, but we believe the improving consumption environment and Nestle’s solid fundamentals will help cushion the impact. Its defensive attributes and resilient earnings profile should also continue to support the stock’s rich valuation and dividend payout.

• 1H22 results were within our expectations but above consensus’. Net profit of MYR375m (+21% YoY) reached 58% of our forecasts but 62% of consensus’ vs the 5-year historical average of 57%. Post results, we make no changes to our earnings forecasts and DCF-derived TP of MYR141 (inclusive of an 8% ESG premium). The TP implies 48x P/E FY22F (excluding Cukai Makmur’s impact), close to +0.5SD from the stock’s 5-year mean.

• Results review. YoY, 1H22 revenue rose 18% to MYR3.3bn on the back of robust growth from both domestic (14%) and export (36%) divisions, following the volume recovery in out-of-home channels. 1H22 GPM slipped 2.5ppts to 32.8% as a function of higher commodity prices and unfavourable FX, but 1H22 PBT surged 33% to MYR527m from a reduction in COVID- 19-related expenses and the sales recovery. 1H22 ETR is higher by 6.8ppts at 28.8% primarily due to the Cukai Makmur adjustments. QoQ, 2Q22 sales moderated by 3% to MYR1.6bn as 1Q22 was a high base boosted by the Lunar New Year festival. This, coupled with the QoQ GPM erosion, led to a 17% decline in 2Q22 net profit to MYR170m. DPS of 70 sen was declared for 1H22 (1H21: 70 sen).

• Outlook. Management foresees the disruption in global supply chains and volatility in commodity prices to be the key headwinds approaching 2H22F, whilst the prolonged war in Ukraine and rising inflation are other relevant risks. That said, we believe the current consumption environment is favourable for Nestle to sustain the topline recovery seen so far in 1H22, considering the better containment of the pandemic and ongoing economic recovery. This will be further aided by Nestle’s established brand equity, product innovation, and engaging marketing initiatives to stimulate sales. Meanwhile, the retreat of key commodity prices, if sustained, together with Nestle’s continuous efforts to enhance operational efficiencies should help to relieve GPM pressure going forward.

• 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 - 28 Jul 2022