Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Nestle (Malaysia) with a lower FV of RM111.09 based on DCF valuation (5.2% WACC, 2.0% terminal growth rate). At RM111.09/share, the implied PE for FY20F is 35.2x. We have trimmed our FY19F, FY20F and FY21F earnings forecasts by 4.7%, 5.3% and 7.1% respectively.

• 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 52.9x PE which is a premium to Nestle’s 5-year forward PE of 37.1x, we believe that the stock is fully valued.

• Nestle’s 1HFY19 core net profit accounted for 51.2–51.4% of our and street’s full-year earnings forecasts. We deem this as below expectations as 1H typically makes up about 62% of full-year earnings.

• Nestle’s 1HFY19 top line of RM2,788.4mil grew 1.8% YoY (3.5% YoY after excluding the chilled dairy business). Domestic sales rose 4.1% YoY driven by robust demand and impactful marketing and promotional activities during the Chinese New Year and Hari Raya festive sales.

• Nestle’s EBITDA inched up 0.8% YoY to RM597.9mil in 1HFY19 as EBITDA margin increased by 0.5ppt to 22.1% on the back of improved operational efficiencies. Nestle’s new distribution centre started operations in May 2018.

• The group was adversely impacted by various external headwinds like volatile exchange rates and global economic uncertainties. Nestle was also affected by a oneoff warehousing expenses in preparation for its factory expansion in Chembong. Nestle’s effective tax rate increased to 23.4% in 1HFY19 from 22.0% in 1HFY18 as the group no longer enjoy tax incentives.

• Nestle was also affected by a slightly higher cost of commodities due to a weaker MYR against the USD. This offset favourable raw material prices movement as shown in Exhibits 1–4. (sugar -9.5% YoY; arabica -22.0% YoY; robusta -14.8% YoY; cocoa -5.0% YoY).

• We anticipate FY19F and FY20F EBITDA margins to be 19.0% and 19.7% respectively supported by operational savings from the streamlining of the group’s supply chain.

Source: AmInvest Research - 28 Aug 2019