• Downgrade SELL (TP: RM88.50). Nestlé’s 9MFY24 net profit of RM374.5mn (-26.8% YoY) came in below both our and consensus expectations, accounting for only 56.8% and 59.6%, respectively. A lower interim DPS of 35sen was declared (vs 3Q23: 70sen), bringing YTD DPS of 105sen (vs 9M23: 140sen). Nestlé’s 3QFY24 revenue and net profit declined by -18.4% YoY and -36.1% YoY respectively, mainly due to a drop in domestic sales driven by weakened consumer sentiment and the high base effect from 3QFY23. Looking ahead, we expect Nestlé's earnings to face ongoing challenges over the next few quarters, driven by constrained purchasing power, soft consumer sentiment potentially exacerbated by boycott effects and coupled with commodities input cost pressure. We have revised down our FY24-FY26F earnings forecasts by 28%-30% to reflect lower sales and higher operating costs. Consequently, we downgrade to SELL with a newly DDMderived TP of RM88.50 (from RM119.40). This is based on WACC: 6.8% and TG: 2%, implying a 42x PER for FY25F.

• Key Highlights. On a QoQ basis, revenue declined by -5.1% to RM1.4bn, reflecting the lower sales from the weakening demand. PBT further decreased by -17.4% QoQ to RM104.1mn, impacted by both the decline in sales and persistently high operating costs, particularly from elevated prices of key commodities such as cocoa and coffee. As a result, the PBT margin contracted by 1.1 ppts QoQ to 7.2%.

• Earnings Revision. We have revised lower our FY24F/FY25F/FY26F earnings forecast by -28%/-30%/-30% to account for lower sales and higher operating costs.

• Outlook. Near-term sales growth could be muted due to constrained consumer purchasing power, particularly for Nestlé’s premium products, and soft sentiment, which may be further exacerbated by boycott effects. Additionally, the availability of similar or better alternatives from competitors, combined with subdued consumer sentiment could further pressure Nestlé’s sales. On the cost side, input cost pressures particularly from elevated cocoa and coffee prices, are likely to persist, while the recent announcement of increase in the sugar tax (from 50sen per litre to 90sen per litre) could also impact Nestlé’s earnings outlook

Source: BIMB Securities Research - 25 Oct 2024