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 39.6x.

• Nestle’s 1QFY19 results came in within our and street’s estimates, accounting for 32.3% of full-year earnings forecasts. 1Q is typically the strongest quarter for Nestle, making up 34.6%–36.0% of full-year earnings for the past 3 years.

• Key highlights of Nestle’s 1QFY19 results include: 1. 1QFY19 topline of RM1,452.7mil grew 1.6% YoY on the back of robust domestic sales which rose 4.9% driven by impactful marketing and promotional activities for its Chinese New Year festive period. Excluding the contribution from the divested Chilled Dairy business from its 1QFY18 results, topline was 3.2% higher YoY. 2. Nestle’s EBITDA rose 8.9% YoY to RM366.8mil in 1QFY19 whereas its EBITDA margin increased by 1.7ppts to 25.2% on the back of improved operational efficiency as it began operating its new distribution centre in May 2018. This is in spite of the rise in some of the raw material prices. Comparing 1Q19 against 1QFY18, skimmed milk powder and cocoa prices climbed 43.2% and 3.3% respectively. 3. Nestle’s net profit edged up by 1.7% YoY to RM235.2mil in 1QFY19 on the back of impactful promotional and marketing activities and better operational efficiency but slightly offset by a higher effective tax rate. Nestle’s effective tax rate has increased to 24.8% (vs. 21.6% previously) as the group no longer enjoys tax incentives.

• Nestle has not made any provision for its material litigation case with a claim amount of RM139.3mil as its solicitors opine that the group has a strong defence against the plaintiff’s claim which according to the solicitors, is without merit.

• We believe that the outlook for Nestle’s net profit in FY19F would be upbeat. Although raw material prices may rise, this would be compensated by operational savings from the streamlining of the group’s supply chain.

• We like Nestle for its established presence, position as the market leader in the FMCG space and efforts to streamline its operations, which should translate into improved operating profit margins. However, as the company is trading at 51.4x PE which is close to 1.5SDs of Nestle’s 1-year forward PE of 46.2x, we believe that the stock is fully valued.

Source: AmInvest Research - 24 Apr 2019