• Maintain NEUTRAL, with new TP of MYR134 from MYR141, 7% upside. Nestle’s 9M23 results met expectations as robust topline growth more than offset the rising operating costs. External headwinds may continue to give rise to uncertainties but we believe the group’s solid fundamentals in quality product offering and effective marketing initiatives will help in mitigating the impact. Such a defensive attribute and resilient earnings profile should also continue to support the stock’s rich valuation and dividend payout.

• 9M23 results were within expectations. Core net profit of MYR567m (+2% YoY) accounted for 79-80% of our and consensus forecasts, ahead of a seasonally weaker 4Q23. A second interim DPS of 70 sen was declared, bringing 9M23 DPS to MYR1.40 (9M22:MYR1.40). Post-results, we make no changes to our earnings forecasts but trim our DCF-derived TP to MYR134 after refreshing our risk assumptions. Our TP is inclusive of an 8% ESG premium and implies 41x FY24F P/E, which is slightly below the stock’s 5-year mean.

• Results review. YoY, 9M23 revenue grew 7% to MYR5.4bn as robust domestic demand more than offset the normalisation of export sales from a high base. Meanwhile, 9M23 GPM recovered by 0.5ppt to 31.5%, driven by the easing in commodity prices, higher operational efficiency and ASP adjustments. That said, 9M23 core net profit growth was capped by a higher opex, which we believe will support more aggressive marketing initiatives to spur consumer spending. QoQ, 3Q23 revenue and core net profit were marginally higher by 1% and 2% thanks to the stable domestic demand on the back of active marketing engagements and innovative new product launches.

• Outlook. We foresee a softer 4Q23F ahead as marketing expenses are likely to be frontloaded in preparation for the Lunar New Year festivity. Beyond the immediate term, the challenges remain in the volatility of commodity prices and FX whilst consumer sentiment may stay subdued considering the slowdown in global economy growth and elevated cost of living. That said, we expect resilient domestic consumer spending, particularly staple food, as the Government continues to provide financial aid to the lower income group. In addition, the inflationary impact of targeted subsidy initiatives so far appears to be limited. Hence, we believe Nestle will be able to deliver growth supported by its quality product offering, continuous efficiency gains and strong brand equity.

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

Source: RHB Securities Research - 27 Oct 2023