• Maintain NEUTRAL with lower MYR119 TP from MYR131, 3% downside. Nestle’s 1H24 results underperformed expectations on lower-than- expected sales – negatively impacted by cautious consumer sentiment. Immediate-term earnings outlook is challenging, in view of the inflationary pressures constraining the consumer spending but we expect Nestle to weather through the challenging times thanks to its entrenched fundamentals. As such, we maintain our stance on the stock as the current valuation at -1.5 SD may have priced in the challenges.

• 1H24 results were below expectations. Nestle’s core net profit of MYR300m (-21% YoY) accounted for 39% of our and consensus’ full-year forecasts, dragged down mainly by lower-than-expected sales on the back of weak consumer sentiment. Post results, we cut FY24-26F earnings by 9-14%. Correspondingly, our DCF-derived TP drops to MYR119 (inclusive of an 8% ESG premium), which implies 38x P/E FY25F or 1.5 SD below the stock’s 5- year mean. We believe the valuation is justified, given the challenging immediate-term business environment.

• Results review. YoY, 1H24 revenue slid 8% to MYR3.3bn from the record 1H23 base, dragged by the dampened consumer spending as a result of heightened inflationary pressures. 1H24 GPM was flattish at 31.3% – believed to be driven by price adjustments with commodity prices remaining volatile. Notwithstanding the topline weakness, 1H24 opex rose 5% YoY, likely to support the marketing initiatives to spur spending amidst the subdued consumer sentiment. QoQ, 2Q24 revenue fell 15%, with 1Q24 capturing the festive demand of both Lunar New Year and Aidilfitri. Correspondingly, 2Q24 GPM eroded 4.1 ppt to 29.1%, possibly on lower production utilisation rates and higher commodity prices, eg cocoa and coffee. This led to a sharp 55% QoQ dip in core net profit to MYR94m.

• Outlook. Taking into account the challenging conditions, Nestle expects the negative momentum to at least linger into 3Q24F before moderating towards the year end. We believe the favourable FX trends, effects of cost- pass-through and consumers’ gradual adaptation to the price adjustments are the key drivers to earnings recovery. In addition, demand should normalise on a longer run considering Nestle’s quality product offering and established brand equity, in addition to continuous efficiency gain should help to mitigate cost pressures and maintain competitiveness.

• 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 Jul 2024