• Maintain NEUTRAL and TP of MYR141, 7% upside and c.2% yield. Nestle’s 1H23 results met expectations with healthy topline growth and effective tax rate (ETR) normalisation offsetting the higher input costs and opex. External headwinds may persist but we believe the group’s 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 1H23 results were within expectations. Core net profit of MYR385m (-1% YoY) accounted for 54% of our and Street estimates and is in line with the historical trend. 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, 1H23 revenue rose 8% to MYR3.6bn largely driven by the robust consumption in the domestic market, supported by quality product offering and new product launches. Meanwhile, 1H23 GPM slipped 1.4 ppts to 31.4% on higher input costs compounded by an unfavourable FX. In addition, 1H23 opex was 9% higher YoY likely due to more marketing and brand building activities. That said, the higher costs were partially offset by the normalisation of ETR (-4.1ppt to 24.7%). QoQ, 2Q23 revenue dipped 5% to MYR1.8bn as 1Q23 was boosted by the Lunar New Year festivity. GPM pressure looks to be gradually receding (+1.7ppt), likely a result of cost pass through and lower input costs. However, a swing in opex QoQ led to a 14% drop in 2Q23 core net profit to MYR178m. The group declared DPS of 70 sen for 1H23 (1H22: 70 sen)

• Outlook. Nestle continues to foresee uncertainty and challenges arising from volatile FX, as well as the commodity and energy markets. To mitigate the risks, the group will remain committed to delivering quality products to meet market demand. This will be further complemented by the execution of an effective marketing strategy and innovative product launches in order to strengthen its market share. Meanwhile, GPM should continue to recover sequentially in 2H23F as it had earlier guided for more favourable input costs, which should lend further support to its robust growth.

• 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 2023