• Maintain NEUTRAL and MYR141 TP, 6% upside and c.2% FY23F yield. Nestle’s 9M22 results were broadly in line, with robust topline growth offsetting higher production costs stemming from volatile commodity prices, compounded by unfavourable FX. External headwinds may persist, 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 continue to support the stock’s rich valuation and dividend payouts.

• 9M22 results deemed broadly within expectations. Core net profit of MYR528m (+15% YoY) met 81-82% of our and consensus’ forecasts, and was in line with historical seasonal patterns. Post results, we make no material changes to our earnings forecasts and DCF-derived TP of MYR141 (inclusive of an 8% ESG premium). The TP implies 43x P/E FY23F, which is close to the stock’s 5-year mean.

• Results review. YoY, 9M22 sales jumped 18% to MYR5bn, thanks to a solid showing from both domestic (14%) and export (+30%) markets following the recovery in out-of-home channels – on the back of the broader reopening of economies. However, GPM continues to be under pressure, down 4.1ppts YoY to 30.9% in 9M22, dragged by the volatile commodity prices, unfavourable FX, and a chunky MYR40m write-off. That said, the robust topline growth and lower COVID-19-related costs were able to more than offset the impact from higher raw material costs and tax expenses arising from Cukai Makmur adjustments, spurring a 15% growth in 9M22 core net profit. QoQ, 3Q22 sales inched up by 3% to MYR1.7bn, driven by higher export sales. However, 3Q22 net profit slid 10% on inventory write- off, higher production costs, as well as a swing in marketing expenses.

• Outlook. Notwithstanding the encouraging topline growth, management views the higher production costs and material depreciation of the MYR as major challenges ahead, and will enhance its operational efficiencies to mitigate the impact. Meanwhile, we believe price adjustments will be implemented to pass on some of the higher costs to consumers. As such, we expect Nestle to continue to deliver resilient growth despite the various headwinds, taking into account its established brand equity, product innovation, and engaging marketing initiatives to stimulate sales. Together with the normalisation in ETR going forward, we forecast a FY23F earnings growth of 12%.

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

Source: RHB Research - 26 Oct 2022