Review

• Nestlé (Malaysia) Berhad’s (Nestlé) 1QFY24 core earnings of RM208.7mn accounted for 27% of ours and consensus’ full-year estimates.

• 1QFY24 revenue declined by 3.2% YoY to RM1.78bn, due to slightly lower domestic sales compared to the previous year. Despite the decrease in revenue, core PBT marginally slid by 0.4% YoY to RM272.3mn supported by effective cost management and more favourable commodity costs compared to 1QFY23. Core net profit rose 0.3% YoY to RM208.7mn after stripping off the one-off expenses.

• No dividend was declared for the quarter under review. Briefing Highlights:

• According to management, Nestlé’s first quarter revenue was buoyed by festive sales during Chinese New Year and Hari Raya. However, 1QFY24 revenue has underperformed by 3.2% YoY, primarily due to a 3.9% YoY reduction in domestic sales to RM1.42bn (compared to RM1.48bn in 1QFY23), dragged down by subdued consumer sentiment.

• The gross profit margin improved marginally by 2.8%-pts to 33.4%, thanks to a substantial softening in commodity prices (milk powder, wheat flour and palm oil) in the spot market compared to the peak in 1QFY23.

• Management revealed that there were fewer participants in the marketing contest and reduced spending during festive seasons compared to 2023, primarily due to ongoing inflationary pressures.

• Raw material prices, including cocoa (+217% YoY) and coffee (+25% YoY) are increasing. We believe that the average price adjustment of 5%-6% in July is sufficient to sustain their current margin with effective cost management. However, the group is actively monitoring commodity prices for 2HFY24, and necessary proactive measures will be taken if the high price momentum of cocoa and coffee persists.

• The higher OPEX incurred in 1QFY24, which amounted to RM66.0mn (1QFY23: RM33.0mn), was mainly due to higher marketing expenses to drive the Chinese New Year and Hari Raya sales.

• The 2QFY24 outlook remains challenging due to i) rising commodity costs, and ii) subdued consumer sentiment is expected to persist throughout the quarter.

Impact

• After factoring in the price adjustment effective in July this year, we have revised our earnings forecast for FY24-FY26 by 0.4%-2.5%, respectively.

Valuation

• Maintain Nestle as Hold with a revised target price of RM136.90/share (previously RM132.50) as we roll forward our DDM valuation (k: 6.4%; g: 3.0%).

Source: TA Research - 30 Apr 2024