Investment Highlights

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

• Recall that Nestle’s topline grew 4.9% YoY in its FY18 results. This was attributed to an increase in consumer confidence in Malaysia. Management remains confident that the growth momentum will remain upbeat in the immediate term, boosted by CNY festive promotions.

• Nestle remains committed to maintain its current shelf price. The impact from the sugar tax remains opaque as Nestle is currently getting further details from the authorities. However, we believe that the impact is minimal as canned beverages are a minor contributor to Nestle’s topline.

• Core EBITDA increased by 5.8% YoY in FY18 but EBITDA margins improved marginally by 0.3ppt. The management explained that this was on the back of additional expenses incurred in preparation for Chinese New Year promotions. The group also incurred incremental expense during the transition period to its new national distribution centre which started operating in May 2018.

• 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 although it may be slightly offset by an expected rise in raw material prices. However, we believe Nestle will be able to dampen the effects of rising raw materials price via Nestle S.A. Group’s procurement hub in Malaysia.

• 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 - 28 Feb 2019