We attended Nestlé's analyst briefing last Friday and maintain a positive outlook based on the following key takeaways:

1. Expected Progressive Improvement in FY25
2. Minimal Impact from Sugar-Sweetened Beverage Duty Hike
3. Continued Commitment to ESG Initiatives

Given the recent decline in share price, we see this as a good opportunity for investors to accumulate shares. As a result, we have upgraded Nestlé from Hold to a BUY with a revised TP of RM118.86/share (previously RM124.22). This adjustment is based on our DDM valuation (k: 6.4%; g: 3.0%) and incorporates a 5% ESG premium derived from a 5-Star rating.

Expected Progressive Improvement in FY25

To recap, Nestlé's revenue for 3QFY24 fell by 18.4% YoY to RM1.4bn. Management indicated that revenue growth for FY24 is expected to remain weak due to consumers’ hesitancy toward Nestlé products amid rising living costs, which have disrupted purchasing power. We believe the recent price adjustment for 22 products in July 2024 has further dampened the topline, as consumers may opt for more affordable alternatives in the market. However, management anticipates gradual improvement going forward, as key products like Milo and Maggi continue to be favourites among Malaysians.

With a more positive economic outlook, we expect demand to rebound in FY25, supported by higher disposable incomes and a strengthening ringgit. The anticipated recovery in economic confidence may result in consumers shifting back to familiar brands, with Nestlé positioned to benefit from this trend. Consequently, we project FY25 revenue to increase by 2.9% YoY to RM6.8bn, driven by improved domestic consumption.

Minimal Impact from Sugar-Sweetened Beverage Duty Hike

The impact of the new sugar tax on Nestlé is expected to be minimal, as the group is well-prepared to manage the implications for the small portion of its product line that will be affected. Approximately 30% to 40% of Nestlé's portfolio consists of beverages, including both pre-mixed and ready-to-drink (RTD) products. With only about 3% of RTD beverages exceeding the tax threshold, Nestlé’s exposure is limited. Additionally, given Nestlé’s ongoing efforts to reduce sugar content, it is likely the company will further adjust its offerings to minimize any impact from the tax.

To recap, in Budget 2025, the government announced a 40.0sen per litre increase in the excise duty on sugary drinks, to be implemented in phases starting 1 Jan 2025. This tax will apply to beverages with added sugar or sweeteners exceeding 5g per 100ml and flavored milk drinks containing more than 7g of sugar per 100ml.

Continued Commitment to ESG Initiatives

The group remains dedicated to several corporate social responsibility (CSR) events for 3QFY24. In conjunction with World Cleanup Day, 300 Nestlé employees participated in nationwide beach and underwater cleanups across 5 locations in Sarawak, Terengganu and Port Dickson. YTD, the group has successfully collected approximately 760kg of waste in 2024. Through its commitment to ESG activities, the group has received recognition from the Waste Management Association of Malaysia and has won The Edge ESG Awards. Looking ahead, we believe the group will continue to prioritise ESG initiatives to enhance its brand reputation and foster customer loyalty.

Impact

We have revised our core earnings forecasts for FY24/FY25/FY26 downward by 21.9%/11.7%/11.8%, respectively. This change comes after we adjusted our operating expenses higher and reduced our sales assumptions for the same fiscal years by 3.2%/2.7%/2.5%. Despite these adjustments, we anticipate that FY25 and FY26 will still show growth, driven by an expected improvement in consumer demand as economic conditions stabilise.

Valuation

Given the recent decline in share price, we see this as a good opportunity for investors to accumulate shares. As a result, we have upgraded Nestlé from Hold to a BUY with a revised TP of RM118.86/share (previously RM124.22). This adjustment is based on our DDM valuation (k: 6.4%; g: 3.0%) and incorporates a 5% ESG premium derived from a 5-Star rating.

Source: TA Research - 28 Oct 2024