• Maintain NEUTRAL and TP of MYR141, 3% upside. Nestle’s 1Q23 results broadly met expectations as we look forward to a stronger 2H23F boosted by margin recovery. External headwinds may persist but we believe its solid fundamentals in quality product offering and effective marketing initiatives will help in cushioning the impact. Such defensive attribute and resilient earnings profile should also continue to support the stock’s rich valuation and dividend payout.

• Nestle’s 1Q23 results were broadly within expectations. Core net profit of MYR207m (-0.2% YoY) met 29% of our and Street estimates, below the average of 33% in the past five years. That said, we anticipate a stronger 2H23F ahead, underpinned by margin recovery on favourable commodity prices. Post-results, we make no changes to our earnings forecasts and DCF-derived TP of MYR141 (inclusive of an 8% ESG premium), which implies 46x FY23F P/E, or close to the stock’s 5-year mean.

• Results review. YoY, 1Q23 revenue grew 9% to MYR1.8bn on the back of robust growth of the domestic and export markets. However, 1Q23 GPM slipped 3.4 ppts to 30.6% and led to a 2% drop in 1Q23 gross profit to MYR563m mainly caused by the rise in commodity prices and compounded by unfavourable FX. As a result, 1Q23 core net profit was flattish despite the opex discipline and normalisation in the effective tax rate (ETR) post- Cukai Makmur. QoQ, 1Q23 revenue jumped 12% driven by Lunar New Year seasonality. Together with a positive swing in opex (frontloaded in 4Q22 in preparation of Lunar New Year) and lower ETR, core net profit surged 91% QoQ.

• Outlook. Notwithstanding the robust topline growth, Nestle is cognisant of the elevated headline inflation and uncertainties in commodity prices as challenges. It also foresees the downside risks to the export markets given the slowing global economy growth. On the flipside, the company expects the input cost pressure to ease in 2H23F which we believe should propel margin recovery. This, together with its innovative product launches and continuous efficiency gain should mitigate the headwinds and sustain earnings growth. All in, the company is confident on the long-term prospects of the Malaysian market and has committed to invest capex of MYR1bn in the next three years.

• 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 - 26 Apr 2023