Date: 25 October 2024
Broker: UOB Kay Hian

Company Overview

Nestle Malaysia manufactures, distributes, and exports a variety of food and beverage products. It operates under the Consumer Staples sector.

Stock Data

• Share Price: RM102.50
• Target Price: RM114.00
• Upside: 11.2%
• Shares Issued: 234.5 million
• Market Cap: RM24,130.1 million (US$6,113.5 million)
• 3-Month Avg Daily Turnover: US$2.6 million
• 52-Week High/Low: RM133.90/RM97.72

Major Shareholders

• Nestle SA: 72.6%
• Employees Provident Fund: 9.3%
• BlackRock: 1.9%

Financial Performance

3Q24 Results

• Revenue: RM1,446.2 million
  • Quarter-on-Quarter Change: -5.1%
  • Year-on-Year Change: -18.4%
• Gross Profit: RM452.3 million
  • Quarter-on-Quarter Change: +1.9%
  • Year-on-Year Change: -19.5%
• EBIT: RM121.8 million
  • Quarter-on-Quarter Change: -13.7%
  • Year-on-Year Change: -43.4%
• Profit Before Tax: RM104.1 million
  • Quarter-on-Quarter Change: -17.4%
  • Year-on-Year Change: -48.0%
• Net Profit: RM85.4 million
  • Quarter-on-Quarter Change: -8.7%
  • Year-on-Year Change: -36.1%

Key Financial Metrics

• Core Net Profit: RM85.4 million
  • Year-to-Date Change: -26.8%
• Gross Profit Margin: 31.3%
  • Quarter-on-Quarter Change: +2.1%
  • Year-on-Year Change: -0.4%
• EBIT Margin: 8.4%
  • Quarter-on-Quarter Change: -0.8%
  • Year-on-Year Change: -3.7%
• Core Net Profit Margin: 5.9%
  • Quarter-on-Quarter Change: -0.2%
  • Year-on-Year Change: -1.6%

Market Challenges

Nestle Malaysia continues to face challenges, with sales declining at an accelerating rate due to the erosion of consumer purchasing power. This has led to downtrading within its range of products and a shift towards more affordable brands.

Future Outlook

A gradual improvement is anticipated, with growth expected to return in the first half of 2025. The recent adjustments in Average Selling Prices (ASP) helped mitigate some of the high input costs but were offset by diseconomies of scale.

Earnings Revision and Risks

• Earnings Revision: No changes to earnings forecasts.
• Upside Risks: Lower-than-expected operating costs, stronger-than-expected recovery in sales, and favorable commodity prices.
• Downside Risks: Rising commodity prices and a weakening ringgit against the US dollar.

Recommendation

Maintain a HOLD rating with a target price of RM114.00. Although Nestle Malaysia is typically defensive with resilient demand, its current valuation is less appealing, trading at +0.5 standard deviations to its five-year mean. The company offers dividend yields of 1.9-2.5% for 2024-2026.