Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Nestle (Malaysia) with a higher FV of RM118/share based on DCF valuation after adjusting our discount rate WACC to 4.7% from 5.2% to reflect a lower risk-free 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 an FY21F PE of 41x, which is a premium to Nestle’s 5-year forward PE of 36x, we believe that the stock is fully valued.

• Nestle’s FY19 core net profit of RM652mil (+1.5% YoY) was slightly below earnings estimates. It accounted for 94.0– 94.5% of our and street’s full-year earnings forecasts respectively. We trim our FY20F and FY21F earnings forecasts by around 2% each and introduce FY22F earnings forecast of RM870.3mil.

• Nestle’s 4QFY19 revenue fell by 1.4% YoY (grew 0.1% net of chilled dairy investment). This was largely attributed to subdued export demand on the back of regional and global uncertainties.

• Domestic sales rose 2.8% YoY (+4.7% net of chilled dairy business) supported by strong sales execution, successful product innovations and effective marketing activities. Some of the new products introduced were MILO Nutri Pluz, Maggi Pazzta, Kit Kat Mandarin Orange and Kit Kat Stick Ice Cream.

• Nestle’s 4QFY19 EBIT slid 4.3% YoY to RM182mil. EBIT margin dropped 0.4ppt to 13.7% due to an increase in marketing spend in preparation for an early Chinese New Year festivities.

• Nestle’s FY19 top line was flat (1.6% after excluding the chilled dairy business) at RM5,518mil. Domestic sales climbed 4.7% on the back of strong operational sales execution, anticipation of market trends and a sustained stream of innovation.

• Nestle’s FY19 EBIT grew 3.8% YoY to RM949mil while EBIT margin was slightly higher at 17.2% (16.6% in FY18). The impact of volatile commodity prices (Exhibit 2) and an unfavourable exchange rate were offset by improved operational efficiencies.

• Going forward, we believe that Nestle’s growth will be buoyed by its Chembong plant in Negeri Sembilan, which expanded the capacity for its MILO products by 30%.

• The plant will cater to growing domestic demand and the export markets. With higher capacity, we expect EBIT margins to remain decent at 17–18% as the group achieves better economies of scale.

Source: AmInvest Research - 26 Feb 2020