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 stretched FY20F PE of 45.4x, which is a premium to Nestle’s 5-year forward PE of 37.1x, we believe that the stock is fully valued.

• The key highlights from Nestle’s briefing are as follows: 1. Revenue growth was driven by domestic sales while export sales (which makes up circa 19% of total sales) continue to decline due to tough global economic conditions. 2. The group faced unfavourable raw material prices in 9MFY19. 3. Nestle is making strides in the e-commerce space. 4. Nestle has started operations on its expanded Chembong plant.

• In 9MFY19, Nestle was impacted by a 7.4% decline in its export sales (excluding chilled dairy business) due to softer demand in some of its export markets.

• We believe Nestle’s export sales will continue to be challenged by tough global economic conditions in the subsequent quarters. On a positive note, we expect domestic sales growth to make up for the decline in export sales. We believe that domestic growth will remain robust driven by the e-commerce business, product innovation, sustained consumer demand and strong promotional sales.

• The group faced unfavourable raw material prices from the increase in grain and milk prices in 9MFY19. These are inputs for MILO products. Wheat prices have risen by 15.7% YoY in 9MFY19, followed by barley (+12.0% YoY), and milk powder (+40.2% YoY) (see Exhibit 1). On the other hand, coffee and cocoa prices have declined by 16.1% YoY and 1.3% YoY respectively in 9MFY19.

• Nevertheless, we expect Nestle’s cost of sales to be well managed as its raw materials have been hedged for the rest of the year. We believe the pressure on margins will ease slightly as grain prices have started to decline (wheat -4.6% QoQ and barley -4.3% QoQ) although milk prices continue to rise.

Source: AmInvest Research - 14 Nov 2019