We left Nestlé (Malaysia) Bhd’s virtual analyst briefing with the following key takeaways:
1. Weaker Turnover in 2QFY24
2. 1H Gross Profit Remains Solid Despite Weaker Topline
3. Emphasising the Sustainability of the Group
Maintained HOLD with a lower target price of RM124.22/share (from RM136.9/share) based on DDM valuation (k: 6.4%; g: 3.0%).

Weaker Turnover in 2QFY24

Nestlé's revenue for 2QFY24 decreased by 13.0% YoY to RM1.5bn, primarily driven by a 16.0% decline in domestic sales, which fell to RM1.2bn. Export sales, however, remained flat at RM325.0mn, reflecting a slight increase of 0.4% YoY. The top line reflects declining spending power and weak consumer sentiment, which affected domestic performance in 2QFY24. Looking ahead, export sales are expected to gradually increase, driven by rising demand from international markets.

1H Gross Profit Remains Solid Despite Weaker Topline

Gross profit (GP) margin dropped by 3.2%-pts YoY to 29.1% in 2QFY24. This decline was primarily attributed to lower sales and rising commodity prices, particularly coffee, cocoa, and oats. However, management believes that the impact of rising raw material prices is currently manageable due to the hedging policy in place. Should raw material costs continue to fluctuate, the group will implement necessary proactive measures to mitigate the impact. Although 2Q's topline performance was weaker than in 1HFY23, the GP margin for 1HFY24 remains solid at 31.4%. As a result, we estimate that, with the effective cost measures, the gross profit margin for the upcoming quarter will range between 28%-30%.

Emphasis on the Sustainability of the Group

The group continues to pursue its ESG initiatives, including using fully electric vehicles (EVs) to transport ingredients from its Jurong facility in Singapore to Malaysia, which is part of MILO's production ecosystem. Additionally, the group has participated in forestry initiatives, having planted approximately 3mn trees to date and aiming to plant an additional 1mn trees over the next 12 months through Project REleaf.

Impact

Due to persistently high commodity prices, particularly for cocoa and coffee, we have adjusted our cost assumptions upward by 3.5% to 7.7% for FY24-26. As a result, we have reduced our earnings forecasts by 17.7%/11.4%/7.6% for FY24/FY25/FY26, respectively.

Valuation

We maintained Hold on the stock with a revised target price of RM124.22/share based on DDM valuation (k: 6.4%; g: 3.0%). This adjustment reflects the incorporation of a 5-star ESG premium and a downward revision of our earnings forecast.

Source: TA Research - 29 Jul 2024