KUALA LUMPUR (July 15): Affin Hwang Capital Research has maintained its "hold" rating for Nestle (Malaysia) Bhd at RM140.30 with a discounted cash flow (DCF)-derived target price (TP) that remains unchanged at RM134 with a potential downside of 4.5%.
In a note today, Affin Hwang analyst Chow Wei Nien said the research house expects the stock to continue trading at a valuation premium to its other consumer staple peers, in part owing to Nestle’s dominance in the local food and beverage (F&B) space, its resilient track record and having the perceived scale to better ride through an economic downturn.
Chow said Nestle is set to allocate its highest capital expenditure (capex) in six years at RM280 million, underscoring the group’s commitment to strengthening its future growth capabilities.
Based on the latest available data, Chow said the group remains in a comfortable lead within the packaged food industry, sitting on about 9% market share of the domestic market.
“Given the scale and its established brand equity, we believe Nestle is well equipped to ride through an economic downturn and continue to capture long-term consumption growth opportunities,” he added.
Chow said Nestle’s results for the first quarter ended March 31, 2020 (1QFY20) were not spared from Covid-19 disruption, with out-of-home business heavily affected, adding that higher raw material costs and Covid-19-related expenses further weighed on profitability, leading to a steep 20% year-on-year (y-o-y) earnings decline.
“Nevertheless, gradual improvement is expected to follow in 2HFY20 (second half ending Dec 31, 2020), with most Horeca (hotels, restaurants and cafés) channels gradually operating at near-optimum capacity in addition to a strong pipeline of new product launches.”
Chow said Nestle’s usually defensive businesses are unlikely to be immune from the impact of the pandemic outbreak.
Affin Hwang expects Nestle's 1HFY20 to succumb to the full brunt of lockdown disruption before gradual improvement starts kicking in from 2HFY20.
However, Chow noted the pandemic outbreak had largely expedited a shift towards the e-commerce channel and believes Nestle is well positioned to capture the increasing migration towards online platforms as the group is one of the early adopters of e-commerce within the F&B space through its partnership with Lazada and Shopee — which started in October 2016 and March 2017 respectively.
Nestle’s e-commerce contribution to total turnover has reached about 4%, underpinned by robust double-digit growth rates seen in recent years.
Year to date (YTD), raw material prices have largely trended down, partly attributable to weakness in global demand due to Covid-19 disruption.
This should augur well in providing support to the group’s margins in the subsequent quarters — likely more apparent from 4QFY20 due to some lag effect as the group typically locks in raw material costs in advance.
On the flip side, volatility in the ringgit, which has weakened against the US dollar by about 4% YTD, may partially negate savings from raw material procurement, he added.
“Overall, we estimate bottom-line earnings to decline by 12.6% for FY20, followed by a modest recovery of about 5% for FY21.”
At 9.40am today, Nestle had shed RM1 or 0.71% to RM139.30, valuing it at RM32.9 billion.