Date: October 27, 2024
Broker: Maybank Investment Bank Berhad

Company Overview

Nestlé (Malaysia) Bhd. is an investment holding company engaged in the manufacture, marketing, and sale of food products. The company operates under the ticker symbol NESZ MK.

Stock Performance

• Current Share Price: MYR 100.20
• 12-Month Price Target: MYR 111.50 (+13%)
• Previous Price Target: MYR 111.50
• Market Capitalisation: MYR 23.5B (USD 5.4B)
• 52-Week High/Low: MYR 129.80 / MYR 99.74

Earnings Expectations

Nestlé’s operating challenges are gradually subsiding, with expectations for earnings recovery projected as follows:

• FY25E: +28% Year-on-Year (YoY)
• FY26E: +12% YoY

This recovery is anticipated due to government initiatives aimed at raising disposable income and a potential decrease in external geopolitical tensions affecting product demand.

Earnings Guidance

During the 3Q24 results briefing, management indicated that earnings momentum could see a gradual recovery starting in 4Q24. This improvement is attributed to:

• Decreasing consumer hesitancy towards products.
• Easing pressure on consumer spending.
• Potential cost savings from lower average costs of certain raw materials.

Key Updates

• The recently announced increase in the sugar tax for sweetened ready-to-drink (RTD) products to 90 sen/litre (up from 40 sen/litre) is not expected to significantly impact group earnings. Most of the company’s RTD products are priced below the new tax threshold.
• Despite a decrease in Dividend Per Share (DPS) year-to-date (9M24: 105 sen vs. 9M23: 140 sen), Nestlé has assured that the FY24E net Dividend Payout Ratio (DPR) will be maintained at historically similar levels (average net DPR: 95% to 100% over the past five years).

Risk Factors

Several risks could impact earnings estimates and stock performance:

• A spike in raw material prices may affect profitability.
• Significant appreciation of the USD against the MYR could impact earnings, given that approximately 50% of raw materials are imported and priced in USD. However, about 20% of total sales are from exports, providing some natural hedging.

Conclusion

Nestlé (Malaysia) is positioned to recover from its recent challenges, with a strong emphasis on improving earnings driven by strategic initiatives and favorable economic factors. The company maintains a cautious yet optimistic outlook for the upcoming financial periods.