NESTLE (M) Bhd is undoubtedly one of the most resilient stocks in Bursa Malaysia, having journeyed the current health crisis almost unscathed while retaining its position as the priciest stock in Bursa Malaysia today.
Yesterday, the bellwether consumer stock rolled out its quarterly results which very much reflects dire business conditions in light of the COVID-19 pandemic.
The company posted a 22.3% drop in its net profit for its 9M FY2020 to RM420.23 mil (9M FY2019: RM541.09 mil) while on a quarterly basis, its net earnings for 3Q FY2020 declined 13.8% to RM128.39 mil (3Q FY2019: RM148.99 mil).
Nevertheless, Nestle retained its generosity by dishing out a 70 sen/share dividend payout which goes ex on Nov 26 (3Q FY2019: 70 sen) with the 9M FY2020 dividend amounting to RM1.40 sen/share (9M FY2019: RM1.40).
While its hotel, restaurant and cafe (HORECA) channels began to recover since the beginning of the recovery movement control order, TA Securities Research expects an overall weak FY2020 performance as the group’s domestic “out-of-home business” segment has been negatively impacted by closures of dine-in channels in 1H FY2020.
“(It) may potentially experience another weakness in 4Q FY2020 due to re-tightening of restrictions amid rising COVID-19 cases,” wrote Jeff Lye Zhen Xiong in a results review.
“We reckon the operational expenses should be more manageable going forward given that the group would optimise its brands marketing to areas that deliver greatest yields, thus partly mitigate the increase in expenses required to maintain the strict containment measures.”
Above all else, Lye noted that Nestle remains innovative on product development and has set aggressive capex plan of RM280 mil this year to invest on high technology production lines which include establishing the pioneering plant-based meal facility and expanding the capacity of its MAGGI noodle.
“The recent announced expansionary Budget 2021 which aims to protect the well-being of the people, specifically the B40 group, is positive to Nestle given most of its products are for the masses,” justified Lye.
All-in, TA Securities Research maintained its “sell” rating on Nestle with an unchanged dividend discount model (DDM)-based target price of RM143.00.
Also, retaining its “sell” call on Nestle is Hong Leong Investment Bank (HLIB) Research which opined that the re-implementation of the conditional movement control order (CMCO) remains a bane for Nestle given its exposure to out-of-home consumption.
“Furthermore, we expect on going expenses related to COVID-19 to continue to result in slimmer margins versus FY2019 for the foreseeable future,” noted analyst Gan Huan Wen.
After earnings adjustment, HLIB Research reduced Nestle’s DDM-based target price to RM103.00 from RM103.45 previously.
“While sales have started to shift back to HORECA channels in 3Q FY2020, we reckon it will remain below FY2019 levels for the remainder of FY2020 given the resumption of CMCO restrictions in a number of states and therefore sluggish HORECA operations,” projected the research house.
At 9.32am, Nestle was unchanged at RM141 with 100 shares exchanged hands (market capitalisation: RM33.06 bil). – Nov 11, 2020
