• Nestle’s 1H17 net profit of RM392.5m was in-line with ours and consensus estimates to make up 58% and 59% respectively.

• 1H17 revenue increased 4% due to higher domestic and local sales from effectives and trade activities. However, earnings drop 4% yoy due to higher effective tax rate and higher input cost.

• An interim dividend of 70sen (vs 1H16: 70sen) was declared, translating to a decent yield of 3.3% for FY17.

• We maintain Hold recommendation with TP of RM80.70 based on DDM methodology (WACC: 8.3%).

Earnings impacted by higher effective tax rate and input costs

Overall 1H17 registered lower earnings of RM392.5m (-4%) despite a 4% revenue growth. The decline was mainly on higher effective tax rate (up 4 ppts to 22%) as pretax earnings grew marginally by 1% YTD aided by lower marketing expenses.

Impacted mainly by higher input costs

Revenue in 2Q17 grew 3.8% yoy on higher domestic and export sales. Domestic sales growth was attributed to marketing and trade activities held for Ramadhan and Hari Raya. Nevertheless, earnings fell 14.2% yoy on higher input cost and effective tax rate. Management noted that raw material (ie. coffee, milk powders, and palm oil) prices had risen by some margin. We note that COGS made up 63% of revenue (2Q16: 58%). As a result, EBIT margin fell 1.4 ppts to 17.2%. In the same vein, 2Q17 earnings also declined 29.7% qoq as it also contended with weaker sales which declined -6.4% qoq.

Dividend declared

An interim DPS of 70 sen (1H16: 70sen) was declared. We expect full year DPS of 280sen, translating into divided yield of 3.3%.

Outlook remain intact

Price of raw materials is expected to put pressure on Nestle’s margins. However, we believe it could mitigate the impact by extracting better efficiencies. We also expect the improving global and local economy would help to boost sales in 2H. Additionally, Nestle aims to deliver RM30m e-Commerce sales in FY17. We make no adjustments to our earnings forecast at this juncture.

Maintain Hold with TP of RM80.70

Maintain Hold with a DDM-derived TP of RM80.70 (WACC: 8.3%). This implies an FY17F PE of 28x which we deem as fair given that it is similar to its 3-year average historical PE.

Source: BIMB Securities Research - 22 Aug 2017