Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Nestle (Malaysia) with an unchanged FV of RM111.09/share based on DCF valuation (5.2% WACC, 2.0% terminal growth rate).

• 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 a hefty 45.4x FY20F 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 9MFY19 core net profit (-2.6% YoY) was in line with earnings estimates. It accounted for 75.2%–74.0% of our and street’s full-year earnings forecasts respectively.

• Nestle’s 3QFY19 top line rose 4.9% QoQ to RM1,400.8mil mainly due to the effectiveness of the group’s marketing plans. But on a YoY basis, Nestle’s revenue fell by 2.2%. Sales were exceptionally strong in 3QFY18 as the GST was reduced to zero from 6%.

• Nestle’s 3QFY19 EBIT slid 3.2% QoQ but rose 1.6% YoY to RM200.9mil. EBIT margin dropped 1.2ppt QoQ to 14.3% due to an increase in marketing spend in preparation for the holiday season. On the other hand, on a YoY basis, EBIT margin improved by 0.5ppt in 3QFY19 supported by cost savings initiatives.

• Nestle’s 9MFY19 top line grew 0.4% YoY (2.1% after excluding the chilled dairy business) to RM4,189.2mil. Domestic sales climbed 4.6% (net of chilled dairy business) on the back of robust consumer demand, effective marketing campaigns and successful product innovations.

• Nestle’s EBIT inched up 0.8% YoY to RM730.2mil in 9MFY19 while EBIT margin was slightly higher at 17.43% (17.37% in 9MFY18). The impact of higher commodity prices and unfavourable exchange rate were offset by improved operational efficiencies.

• We believe that Nestle’s growth will be buoyed by the completion of its Chembong plant in Negeri Sembilan, which will expand the capacity for its Milo products. With higher capacity, we expect EBITDA margins to remain decent as the group achieves better economies of scale.

• We anticipate FY19F and FY20F EBIT margins to be 17.2% and 17.6% respectively supported by operational savings from the streamlining of the group’s supply chain and the commissioning of its Chembong plant in FY20F.

Source: AmInvest Research - 13 Nov 2019