NESTLÉ (M) Bhd’s 9MFY22 core earnings of RM519.3m came in within our and consensus FY22 estimation. The core PAT represented 74.7% of our estimate and 79.7% of the consensus after excluding a one-time off item of RM31.8m. 

Its 3QFY22 core PAT slumped -30.6% QoQ to RM127.9m mainly attributed to higher commodity prices. As such, gross profit margin dropped to 27.3% from 31.6% in 2QFY22. The group’s revenue rose +2.7% QoQ to RM1.68b thanks to higher export sales. On yearly basis, the group reported a -12.5% YoY fall in core PAT to RM127.9m owing to greater commodity prices and the impact of prosperity tax (Cukai Makmur). The increased revenue was supported by normalising economic activity both locally and worldwide, which improved both domestic and export sales (+13.5%YoY) and domestic sales (+30.2%YoY). 

Solid performance in 9MFY22. 

Nestlé reported RM5b in revenue for the 9MFY22 (versus RM4.3b in 9MFY21). The positive momentum was contributed by the higher domestic and export sales on the back of stronger growth in both food and beverages and out-of-home segments. The impact of higher commodity prices and the prosperity tax was partially offset by higher sales and lower Covid- 19 expenses. As a result, core PAT increased by +13.3% YoY to RM519.3m in 9MFY22. 

Consistent dividend payout. 

Nestlé declared an interim dividend of 70 sen/share, bringing the total dividend to 140 sen in 9MFY22 (ex-date: Nov 18, 2022). The declared dividend for 3Q is consistent with the dividend declared for 3Q over the previous five years. 

Maintain ‘Neutral’ with a revised TP of RM137.80 (previously RM141.50).

We make no changes to our earnings forecast as earnings came in within our estimation. Our TP is based on a DDM-based valuetion with a sustainable growth rate of 2.5% and a revised weighted average cost of capital of 5.8%. We expect the group to continue experiencing cost pressure ahead, due to the high commodity prices and energy costs. Nevertheless, we think that the top-line growth would remain solid ahead, supported by its staple nature coupled with its continuous product innovation to meet different consumer preferences. 

Downside risks are: (i) a further increase in commodity prices which posted upward pressure on the margin; and (ii) higher than expected energy cost. 

Recommendation: Neutral Target Price: RM137.80
by MIDF Research (Oct 27)

• This article first appeared in The Malaysian Reserve weekly print edition