• Nestle’s 1H17 net profit of RM684.7m was in-line with ours and consensus estimates at 75% and 76% respectively.

• 9M17 revenue rose 4.3% on higher domestic and exports sales but earnings fell 10% with higher raw material and marketing cost.

• An interim dividend of 70sen (vs 9M16: 70sen) was declared, translating to a decent yield of 3.2% for FY17.

• We raise our DDM-derived TP to RM92.00 (from RM80.70) after rolling valuations to FY18 based on WACC of 8.1%.

Earnings impacted by higher input costs

Nestle 9M17 registered lower earnings of RM512.3m (-10%) despite a 4% revenue growth. This was due to higher raw material prices (i.e sugar, milk powder and coffee beans) and higher trade and marketing promotions.

Impacted mainly by higher input costs

Revenue in 3Q17 grew 4.8% yoy on higher domestic (+4.2%) and export sales (+6.8%). Domestic sales growth was attributed to marketing activities held in conjunction with the SEA Games and new product launches. However, net earnings fell 25.5% yoy on higher raw material cost and higher A&P in 3Q17. As a result, EBIT margin fell 3.7ppts to 11.6%. On the same note, 3Q17 earnings also declined 26% qoq.

Dividend declared

An interim DPS of 70 sen (3Q16: 70sen) was declared. As to date a tota of 140 sen DPS had declared. We expect full year DPS of 280sen, translating into divided yield of 3.3%.

Outlook remain intact

We believe the rising raw material prices would continue to put margins under pressure. Nevertheless, we believe this could be mitigated over time with price increments apart from ongoing cost initiatives. Nestle has since 1 Jul 2017 raised prices of select product (i.e. coffee and noodles) by 1-4% on average. This should see Nestle sustaining its strong FCF generation and, in turn, its dividend commitments.

Maintain Hold with new TP of RM92.00

Maintain our FY17 and FY18 forecast at this juncture on the expectation of higher earnings in 4Q17 due to spill over from greater marketing investment done in previous quarter. We have a new TP of RM92.00 from RM80.70 after rolling over to FY18. Valuation is based on DDM methodology with WACC of 8.1%.

Source: BIMB Securities Research - 8 Nov 2017