• Maintain HOLD (TP: RM119.40). Nestle’s 1HFY24 Net Profit of RM289.1mn (-23.5% YoY) was below both our and consensus expectations, accounting for only 36.4% and 37.5% respectively. An interim DPS of 70 sen was declared (vs 1H23: 70 sen) and our FY24F DPS of 280 sen, translating into a dividend yield of 2.3%. Nestle’s 2QFY24 revenue and net profit declined by -13.0% YoY and -48.3% YoY respectively, mainly due to a drop in domestic sales driven by subdued consumer sentiment and higher input costs. Moving forward, we anticipate 2H24 sales to moderate due to weakening consumer sentiment. We revise our FY24F/FY25F/FY26F earnings by -17%/- 17%/-16% to factor in lower sales and higher operating costs. Consequently, we maintain HOLD with a newly DDM-derived TP of RM119.40 (from RM134.20). This is based on WACC: 6.8% and TG: 2%, implying a 40x PER for FY25F.

• Key highlights. Revenue and net profit in 2QFY24 both declined to RM1523.3mn (-13% YoY) and RM93.6mn (-48.3% YoY) respectively, primarily driven by weaker domestic sales from subdued consumer sentiment and higher input costs, particularly for commodities such as cocoa and coffee. On a QoQ basis, revenue decreased by -14.5% due to lower quarterly demand, compared to the previous quarter which benefited from high sales during Chinese New Year and Ramadan. Net profit further dropped by -52.1% QoQ, impacted by higher operating costs due to rising prices of some commodities, compounded by an unfavourable exchange rate. As a result, the profit margin compressed by -4.8 ppts to 6.1%.

• Earnings Revision. We revise our FY24F/FY25F/FY26F earnings by -17%/- 17%/-16% to factor in lower sales and higher operating costs estimates.

• Outlook. Near-term sales growth could be moderate due to persistent weakening consumer sentiment, particularly affecting Nestle’s premium products. Additionally, greater competition from similar and more nutritious alternative products may further challenge sales. However, the input cost pressure, especially from higher cocoa and coffee prices, may be mitigated by favorable forex exchange anticipated from a strengthening ringgit.

Source: BIMB Securities Research - 26 Jul 2024