Review

• Nestlé (Malaysia) Berhad’s (NESTLE) 1HFY23 core net profit of RM390.5mn came in within expectations at 53% and 55% of ours and consensus’ full-year estimates, respectively.

• YoY, the group’s 1HFY23’s revenue rose 8% to RM3.6bn compared to 1HFY22, contributed by higher domestic sales backed by double digits growth of 11.6% in domestic demand post pandemic. That said, the domestic growth was partially muted by the decline in export sales, owing to the high base effects in the previous corresponding period.

• The 1H23 adjusted PBT fell 5.2% YoY to RM514.6mn. We believe that the PBT margin erosion mainly attributed to: (i) elevated commodity cost, (ii) the increment of minimum wages, and (iii) weakening of the Ringgit. To note, the effective tax rate came down by 4.1ppt YoY in the absence of prosperity tax. All in, NESTLE registered a core net profit of RM390.5mn (versus RM390.9mn in 1HFY22) after stripping off the one-off expenses.

• QoQ, 2QFY23 core net profit slid by 12% due to higher sales generated from Chinese New Year festive in previous quarter and higher marketing cost.

• The group has declared an interim dividend of 70 sen during the quarter under review.

Impact

• No changes to our earnings forecasts pending analyst briefing on 28 July.

Outlook

• Going forward, the group’s sales volume is likely to be softened in 2HFY23 due to the low seasonality effect. However, we are cautious on the recovery of profit margin due to sustained commodity costs pressure, especially the cocoa bean and raw sugar.

Valuation

• Maintain Sell with unchanged target price of RM136.80/share (implying 39x FY24 EPS) based on DDM valuation (k: 6.4%; g: 3.0%).

Source: TA Research - 28 Jul 2023