• Maintain NEUTRAL, new TP of MYR131 from MYR133, 7% upside with c.3% FY24F dividend yield. Nestle (M)’s FY23 results met expectations, thanks to its steady topline growth and effective cost control. External headwinds may continue to give rise to uncertainties, but we believe the group’s solid fundamentals in quality product offerings and effective marketing initiatives will help to mitigate the impact. Its defensive attributes and resilient earnings profile should also continue to support the stock’s rich valuation and dividend payout.

• Nestle’s FY23 results exceeded expectations. Core net profit of MYR747m (+20% YoY) accounted for 104% and 105% of our and consensus forecasts – due to higher-than-expected sales and better-than-expected opex control. Post-results, our earnings forecasts are materially unchanged and we roll out FY26F earnings (+4% YoY) in this report. Correspondingly, we adjust our DCF-derived TP to MYR131 (inclusive of an 8% ESG premium), which implies 40x FY24F P/E ie below the stock’s 5-year mean.

• Results review. YoY, FY23 sales grew 6% to MYR7.1bn, with solid demand in the domestic market more than offsetting the impact of a decrease in its export sales, which normalised from a high FY22 base. FY23 GPM expanded by 1.1ppt, likely as a result of ASP adjustments coupled with higher operational efficiency. Together with prudent opex control, FY23 core PBT climbed 12% YoY. Meanwhile, NESZ’s core net profit growth was more spectacular at 20%, due to the normalisation of its ETR post-Cukai Makmur. On a QoQ basis, 4Q23 sales dropped by 5% to MYR1.7bn, likely due to a seasonal swing but 4Q23 net profit was 7% higher at MYR191m thanks to a GPM expansion of 2ppt, ie possibly a function of lower input costs. FY23 DPS totalled MYR2.68, reflecting a payout ratio of 95% (FY22: MYR2.62, 99%).

• Outlook. Generally, we expect consumption to remain resilient especially for consumer staple products – in view of the robust employment market and continuous assistance by the Government to lower-income groups. More stable commodity prices would be beneficial for NESZ when it comes to cost planning and pricing strategies, but this may be offset by an unfavourable swing in FX and freight rates. That said, we believe NESZ will continue to enhance its operational efficiency to mitigate any cost inflation. On top of that, innovative product launches and engaging marketing activities are effective tools to drive consumer spending and further consolidate its strong market position.

• Downside risks include a sharp rise in input costs and a significant loss in market share. The converse represents the upside risks.

Source: RHB Research - 28 Feb 2024