Review

• Nestlé (Malaysia) Berhad’s (Nestlé) 3QFY24 results came in below expectations. The negative variation was primarily due to weaker-thanexpected sales and higher-than-expected operating expenses. As a result, the 9MFY24 results accounted for 58% and 59% of our and the consensus forecasts, respectively. 

• 3QFY24 core earnings plunged by 56.3% YoY to RM84.5mn, mainly driven by i) a lower turnover of RM1.4bn (-18.4% YoY), compared to exceptionally high sales in the previous year, and ii) increased operating expenses of RM330.5mn (+4.7% YoY). Consequently, the EBIT margin contracted by 7.1%-pts YoY to 8.4%. The weaker earnings were largely attributed to soft domestic sales, as affordability concerns weighed on consumer spending. 

• Cumulatively, 9MFY24 sales declined by 11.4% YoY to RM4.8bn due to i) cautious consumer spending and ii) a high base effect from record revenue in 9MFY23. As a result of the weaker topline, core earnings plunged by 36.1% YoY to RM373.3mn. 

• The group has declared a second interim dividend of 35.0sen/share (3QFY23: 70.0sen/share) for the quarter under review, bringing its YTD dividend to 105.0sen/share (9MFY23: 140.0sen/share). 

Impact 

• We made no change to our earnings forecasts, pending an analyst briefing today for more insights. 

Outlook 

• We expect 4QFY24 to remain challenging due to cautious consumer spending and headwinds from rising raw material costs, specifically cocoa (+82.6% YTD) and coffee (+54.5% YTD). Nonetheless, we anticipate that the group will maintain its gross profit margin through cost efficiency measures and price revisions. Accordingly, we project a gross margin of 31.2% for FY24, compared to 31.6% in FY23. 

Valuation 

• We maintain our TP for Nestlé at RM124.22/share, based on a DDM valuation (k: 6.4%; g: 3.0%) and incorporate a 5% ESG premium for its 5- star rating. Consequently, we are placing our Hold recommendation under review, pending further guidance on the FY25 outlook. 

Source: TA Research - 29 Oct 2024