Nestle’s 1HFY22 core net profit of RM374.8m was within analyst expectations but above consensus’.
It amounted for 53.9% of ours and 62% of consensus full-year forecast. The group declared its first interim dividend of 70sen/share (ex-date: 8 September 2022), translating 1.8% of dividend yield.
Nevertheless, the company continues to experience cost pressure moving forward because of the rising commodity prices and depreciation of the ringgit against the U.S. dollar.
"Although Nestle may raise the selling price of the goods, we believe that it will have limited room to fully pass on the costs to the consumer due to the inelastic demand for its product. Nevertheless,
"Nestle's long term prospect are favorable underpinned by its strong balance sheet, which could provide cushion towards potential economy downturn," says MIDF.
"We make no changes to our earnings estimates pending analyst briefing. Our TP is based on DDM-based valuation with a sustainable growth rate of 2.5% and weighted average cost of capital (WACC) of 5.2%."
Downside risks and plummeting profit
Major downside risks are: a significant depreciation of RM against the US Dollar; and a further increase in commodity prices which posted upward pressure on the margin. The stock is currently trading at 45.5x FY22F PE, above the 32.1x average FY22F PE of its peers.
2QFY22 core net profit plummeted -20.4%qoq to RM164.8m in line with -3.2%qoq declined in revenue to RM1.6b. This was primarily caused by lower sales amid stronger CNY sales in the previous quarter along with elevated commodity prices which resulted in higher input costs.
As a result, the gross profit margin has been under pressure and decreased by -2.4ppt. On yearly basis, the group’s revenue increased +18.8yoy, driven by domestic (+12.5%qoq) and export sales (+48.1%qoq) thanks to the robust recovery in demand and consumer spending after the reopening of the economy and border.
Core net profit was higher at RM164.8m (+22.5%yoy), mainly due to lower COVID-19- related costs, more than offsetting the effects of rising commodity prices, unfavorable currency rates, and prosperity tax.
Stronger year-on-year result
Nestle’s 1H22 revenue rose +17.8%yoy to RM3.3b and core net profit grew +20.1%yoy to RM309.7m.
The better performance was lifted by a stronger growth in both core Food & Beverages (+16.7%yoy) and Out-of-home (+23.4%yoy) division, which demonstrates a continuous rise after the relaxation of mobility restriction.
The group debuted two new plant-based products during the quarter, namely HARVEST GOURMET Plant-based Nuggets and NESCAFE FOLCE GUSTO Almond Flat White and Coconut Flat White in Malaysia. T
here has been a shift in consumption patterns and growing demand for plant-based products, yet we do not expect the segment to have a substantial contribution to the revenue in the mid-term as it is still in the beginning stage.