• Maintain NEUTRAL and MYR131 TP, 3% upside and c.3% FY24F yield. Nestle (M)’s 1Q24 results met expectations, as GPM recovery more than mitigated the topline softness and higher opex. Whilst consumer spending is unlikely to be exciting going forward, we believe Nestle’s entrenched fundamentals should bring about earnings resiliency and underpin the generous dividend payout. Such defensive attributes should offer a safe shelter to investors with lower risk appetites – hence supporting the rich valuation.

• 1Q24 results were within expectations. Core net profit of MYR207m (+5% YoY) makes up 27% of both our and consensus’ forecasts. Post results, we make no changes to our earnings forecasts and DCF-derived TP of MYR131 (inclusive of an 8% ESG premium), which implies 40x FY24F P/E or below the stock’s 5-year mean.

• Results review. YoY, 1Q24 revenue fell 3% to MYR1.8bn, which the group attributed to a slight decline in domestic sales (-4%) on subdued consumer sentiment. Meanwhile, we believe the timing of the Aidil Fitri festival in FY24 was unfavourable to 1Q24, which contained a longer period for the Ramadan fasting month (20 days vs 1Q23’s nine days). On a positive note, 1Q24 GPM expanded by 2.6ppts to 33.2%, mainly a function of lower commodity prices and continuous efficiency gains. This more than offset the hike in 1Q24 opex (+13% YoY) on heightened marketing expenses to account for both the Lunar New Year and Aidil Fitri festivals. QoQ, 1Q24 revenue rose 6%, spurred by Lunar New Year seasonality. Correspondingly, core net profit climbed 8% QoQ.

• Outlook. Management has continued to observe cautious consumer spending, which could persist into the rest of FY24, considering the elevated inflationary pressures. Meanwhile, the volatility of commodity markets would be another key challenge for the group, as Nestle has put in place price increases for selected products starting Jun-Jul 2024, mainly to pass on the higher cocoa and coffee input costs. Further adjustments would depend on the movement of commodity prices and FX. Notwithstanding, we expect consumption to remain resilient, particularly for consumer staple products, underpinned by the healthy employment market and continuous assistance by the Government to lower-income groups. In addition, Nestle’s dominant market position, innovative product launches, and engaging marketing initiatives should also help to maintain its competitiveness.

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

Source: RHB Research - 30 Apr 2024