Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Nestle (Malaysia) with a lower FV of RM122.74 (RM125.00 previously) based on DCF valuation (5.3% WACC, 2.0% terminal growth rate). At RM122.74/share, the implied PE for FY19F is 39x.

• We have reduced Nestle’s FY19F and FY20F net profit by 2.3% and 2.5% respectively to account for higher effective tax rate and operating expenses. We have also introduced FY21F net profit forecast of RM886.2mil.

• Nestle’s FY18 results were below both our and street’s estimates, accounting for 92.3%–90.8% of full-year forecasts.

• Key highlights of Nestle’s FY18 results included: 1. FY18 topline of RM5,519mil grew 4.9% YoY on the back of improved consumer sentiment domestically, coupled with effective product innovations. Nestle’s Maggi noodles range saw a strong growth due to the launch of its new range, the Pedas Giler variety which boosted sales. 2. Comparing FY18 against FY17, Nestle’s core EBITDA rose 5.8% to RM1,033.1mil. Core EBITDA margins increased 0.3ppt to 19.0% driven by favourable raw material prices despite a 15.3% YoY rise in cocoa price (sugar -22.5%, skimmed milk powder -12.4%, coffee -17.4%) and improved supply chain efficiency. 3. Nestle’s core net profit fell marginally by 0.1% YoY to RM642.1mil due to higher interest expense and higher effective tax expense. Nestle’s effective tax rate has increased to 24.8% as the group no longer enjoy tax incentives. We have excluded the one-off gain on divestment of the group’s chilled dairy business and disposal of leasehold land amounting to RM16.8mil.

• We believe Nestle’s net profit in FY19F will remain upbeat with its long track record of strong earnings further boosted by the streamlining of its supply chain efficiencies but may be slightly offset by an expected rise in raw material prices.

• We like Nestle for its established presence, position as the market leader in the FMCG space and management’s progressive efforts to streamline its operations with expectations of improved margins. However, as the company is trading at 53.0x PE which is close to 2 SDs of Nestle’s 1-year forward PE of 46.2x, we opine that the stock is fully valued.

Source: AmInvest Research - 27 Feb 2019