• Maintain NEUTRAL, new MYR103 TP from MYR119, 1% upside. 9M24 results missed expectations on softer-than-expected sales, with consumer sentiment remaining cautious on the back of inflationary pressures. That said, with signs of recovery emerging, and in view of Nestle (M)’s position to capitalise on accommodative government policies, we maintain our stance on the stock. With the counter now trading at -1SD over its 5-year mean, the weakness could have been largely priced in.

• 9M24 results were below expectations. Core net profit of MYR410m (-27% YoY) only met 62-65% of our and consensus’ forecasts – mainly due to lower- than-expected sales. Post results, we cut FY24F-26F earnings by 19%, 14%, and 12% after factoring in lower sales assumptions. Correspondingly, our DCF-derived TP drops to MYR103 (inclusive of an 8% ESG premium given Nestle’s 3.4 score vs the 3.0 country median), which implies 38x FY25F P/E or at -1SD over its 5-year mean.

• Results review. YoY, 9M24 revenue fell 11% to MYR4.8bn. This primarily stemmed from the weak domestic sales – impacted by cautious consumer sentiment amidst heightened inflationary pressures. Correspondingly, 9M24 earnings fell 27% to MYR410m on flattish GPMs and elevated opex – notwithstanding the material drop in sales. QoQ, 3Q24 revenue contracted by 5% QoQ to MYR1.4bn – possibly due to the lack of festivities and persistently subdued consumer sentiment. That said, 3Q24 GPM expanded by 2.1ppts, which could be driven by favourable input costs and effects of ASP adjustments, whilst 3Q24 effective tax rate or ETR was lower at 18%, This more than offset the topline weakness, propelling 3Q24 net profit up by 18% to MYR110m.

• Outlook. Nestle has observed some progressive improvements in sales towards the end of 3Q24, which could be signs of demand normalisation, as consumers gradually adapt to the higher prices. Meanwhile, a sustained GPM expansion – with key commodity prices coming off peak levels – should lend further support to an earnings recovery moving forward. Looking further ahead into FY25, private consumption should be supported by government policies – including higher cash assistance and minimum wages – to lift the disposable incomes of the lower-income groups, which have a higher marginal propensity to spend. Such a conducive environment should benefit Nestle, given its diversified F&B products offerings that cater to the mass market.

• Risks to our recommendation include a sharp rise in input costs and major loss of market share.

Source: RHB Research - 25 Oct 2024