We came away from Nestlé (Malaysia) Bhd’s virtual analyst briefing with the following key takeaways: i) No price adjustment will be made despite elevated input costs and higher sugary drink taxes; ii) the effective tax rate in FY23 would remain elevated due to tax nondeductible items; and (iii) cautiously optimistic of FY24 outlook. Downgrade to Sell with a lower target price of RM132.60/share (from RM151.30/share) based on DDM valuation (k: 6.4%; g: 3.0%).

We came away from the virtual analyst briefing on 27 October 2023 post 3QFY23 results with following key takeaways:

No price adjustment will be made despite elevated input costs and higher sugary drink taxes

Despite concerns surrounding elevated input costs and an excise duty increase on sugary drinks announced in Budget 2024, the company has affirmed its decisions to refrain from immediate price adjustments, reflecting a steadfast commitment to its current pricing strategies and a belief in its ability to manage potential margin squeeze factors via other cost-effectiveness measures. Furthermore, the company has strategically positioned itself to withstand the impact of higher sugary drink excise duties by ensuring that most of its products contain less than 5g of sugar per 100ml servings, thereby minimizing the effect of the tax increase.

The effective tax rate in FY23 would remain elevated due to non-tax deductible items

Although there was no recurrence of the prosperity tax, the company continues to grapple with an elevated effective tax rate, which remains above 30%. This persistent high tax rate can be attributed to non-deductible tax items that were incurred during the third quarter of FY23. Notably, a significant RM44mn in asset impairment losses were recognized in 3Q23, specifically relating to certain idle and obsolete equipment stemming from the group's recent manufacturing upgrades. These losses, unfortunately, were not taxdeductible. Despite these challenges, the company is actively pursuing strategies to reduce its effective tax rate to below 30% by the end of FY23, indicating a determined effort to optimize its tax position and enhance overall financial performance.

Cautiously Optimistic of FY24 Outlook

Looking ahead, the company's earnings growth is expected to be supported by robust domestic consumption. However, there is a cautious outlook regarding export sales, primarily due to the robust exports in FY22 and FY23, which created a high base effect. Reverting to pre-pandemic export levels may require a more extended timeline, and as such, a slower recovery trajectory is anticipated in this regard.

Impact

We trim our FY24/25 earnings forecast by 17.4%/17%, respectively, to reflect the Anticipated Drop of Export Sales and Elevated Key Input Costs.

Valuation

Downgrade to Sell with a lower target price of RM132.60/share from RM151.30/share previously (implying PER 39.8x FY24 EPS) based on DDM valuation (k: 6.4%; g: 3.0%).

Source: TA Research - 30 Oct 2023