Nestle Malaysia reported a 3MFY24 core PATANCI of RM219.7m, after excluding a one-time item of RM24.2m. This came in within MIDF’s and consensus’ full-year FY24F projections at 27.6% and 28.6% respectively.
As anticipated, no dividend was declared in 1QFY24, consistent with Nestle’s typical practice of declaration in 2Q, 3Q, and 4Q.
Weaker domestic sales dragged 1QFY24 topline lower.
MIDF Research said today (Apr 30) that on a yearly basis, 1QFY24 revenue slid by -3.2%yoy to RM1.78b, mainly due to decreased domestic sales (-3.9%yoy) and export sales (-0.4%yoy). The gross profit margin improved by +2.8 ppt yoy to 33.4% despite reduced revenue, mainly supported by lower input costs for certain key ingredients (CPO, wheat, milk, pet resin) during the quarter compared to previously.
As such, the core PATANCI rose by 5.4%yoy to RM219.7m in 1QFY24. On a quarterly basis, higher core PATANCI (+10.2%qoq) was mainly due to increased revenue (+5.8%qoq) which was supported by CNY celebration and lower operating expenses.
MIDF attended Nestle Malaysia ‘s virtual briefing and remain neutral on the FY24 outlook. Some of the salient highlights are as follows:
• Higher transportation and warehouse costs amidst the expanded and increased service tax effective 1 March 2024. This was mainly due to cost pass-through from suppliers and distributors. Management alludes that the cost is manageable and remains committed to optimizing costs moving forward.
• Anticipate persistent weak consumer sentiment ahead. We are aware that consumer sentiment will remain challenging amidst an inflationary outlook, weakening RM affecting consumer purchasing power, heightened competition, and a shift in preference towards cheaper and locally produced products. Hence, we remain cautious that the group’s cost pass-through initiative will only partially offset the higher certain input costs to maintain competitiveness against competitors and sustain demand.
Price adjustments remain on the table to pass on higher input costs for certain products. Management highlighted that price adjustments for specific products will occur in June-July 2024 to account for the escalation in cocoa, Arabica, Robusta, tomato, and sugar prices. This aligns with the previous 4QFY23 briefing and our recent report on Nestle on 23 April 2024.
MIDF views that this could allow the group to reduce profit margin erosion for certain product series, particularly “MILO,” “Nescafe,” and “Maggi tomato sauce.” Recall that the group decided to postpone the price hike in November 2022 to support consumers but hinted at gradual increases in FY24.
However, MIDF does not foresee full pass-through in FY24, as we believe remaining competitive and retaining consumers is the key priority ahead.
Cut FY24-26F core earnings. Despite 1QFY24 core earnings came in within expectations, MIDF revised their earnings lower for FY24-26F by -2.2%/-4%/-5.9% respectively. This was after factoring in (1) weaker consumer sentiment due to the inflationary outlook, preference for cheaper and locally produced products, and intense competition, as well as (2) slightly higher transportation and warehouse costs amidst cost pass-through from service providers.
Maintain NEUTRAL with a lower TP of RM126.00 (from RM127.00). MIDF revised TP is based on DDM valuation with a consistent 3.2% growth (down from 3.5%) and an unchanged WACC of 6.7%.
Moving ahead, they are cautious of the softening consumer sentiment on dry convenient F&B, which will remain lacklustre amidst the rising inflationary outlook, geopolitical issues, and volatile forex that could cause consumers to prefer cheaper and locally produced products.
MIDF also expects inflationary pressure on the bottom line due to expanded and higher service tax on transportation & warehouse, as well as the potential rationalisation of fuel in 2HCY24, which could escalate operational expenses.
On a positive note, MIDF is optimistic that Nestle’s strong market position with well-known household brand names and dominance in market share for dry food products, beverages, and coffee will contribute to a steady demand for its products. The stabilization of key input prices (like sugar, milk, and wheat) along with certain product price hikes may partially mitigate the impact of cocoa, Arabica, and Robusta cost escalations.
Hence, MIDF maintains their NEUTRAL call on Nestle.
Valuation. Nestle is currently trading at an FY25F P/E ratio of 35.8x, which is below its two-year average P/E ratio of 50.5x. Additionally, it offers a 2.5% dividend yield in FY24F. Downside risks include (i) a sharp increase in commodity prices; (ii) higher-than-expected energy costs; (iii) stronger USD against MYR exchange rates; and (iv) weaker-than-expected consumer demand due to macro headwinds as well as shifts in consumer preferences.
