• Nestle’s FY17 net profit of RM645.8m was in-line with our estimates coming in at about 95%.

• FY17 revenue rose 3.9% yoy on higher domestic sales, contribution from new innovative products, and continuous promotion. However, earnings grew slower at 1.4% yoy due to higher effective tax rate.

• Final dividend of 135 sen (vs 4Q16: 130 sen) was declared, translating to a dividend yield of 3.6% for FY17.

• We raise our DDM-derived TP to RM125.00 (from RM92.00) based on WACC of 8.1%, and terminal growth rate 5%.

Profit doubled yoy due to change in marketing planning

Net profit for 4Q17 doubled from RM66.9m in 4Q16 to RM133.5m in 4Q17, as expected, which resulted in EBIT margin for the whole of FY17 increasing 34ppts to 16.1%. The higher profit was due to shift in Chinese New Year marketing expenses to the next quarter, 1Q18, which was usually done in 4Q. Domestic sales growth for 4Q were also higher, at 4.5%, which resulted in full year growth of 4.1%, signalling stronger local demand.

Cost efficiencies drove profit higher

For the full year FY17, Nestle registered higher net profit of RM645.8m, +1.4% growth yoy, whilst PBT expanded by 6.2%. The slower net profit growth is mainly due to higher effective tax rate at 20.7% (vs 16.9% FY16) as there was a favourable tax saving in 2016. Revenue for FY17 increases by 3.9% mainly due to stronger domestic (+4.1%) and export sales (+3.0%).

Dividend declared

Nestle has proposed a final dividend of 135 sen per share compared to 130 sen in 4Q16. This translates to 275 sen declared for FY17, slightly higher than 270 sen for FY16. As expected, payout is 100% of profit, and we expect this trend to continue.

Promising long term prospects

We believe that for FY18 and forward, Nestle will benefit from a lower and stable materials cost, as price of commodities has been trending lower since 1H17. We forecast EBIT margins to improve as, raw materials make up about 60% of the COGS, from 16.1% In FY17 to 16.3% in FY18. According to management, Nestle’s FIT strategy will continue the optimisation of processes in the company thus reducing unnecessary costs. Other than that, Nestle’s procurement hub that was launched in Nov 17 will help manage packaging and commodities to be sourced more efficiently.

Maintain Hold with new TP of RM125.00

We maintain our FY18 and FY19 forecast with the expectation of lower cost of raw materials going forward and a favourable cost of running its operation. We have derived a new TP of RM125.00 (from RM92.00 previously) after adjusting for terminal growth rate from 3% to 5%. We believe a long term growth of 5% is reasonable as Nestle has proven its abillity to grow it business and its net profit by an average 7% over the last 10 years. The adjustment in our valuation is to include growth drivers such as i) improving consumer sentiment and growing demand for health and halal products; ii) increasing cost saving from the procurement hub; and iii) product innovation, backed by their parent group, Nestle SA. Valuation is based on DDM methodology with WACC of 8.1%.

Source: BIMB Securities Research - 21 Feb 2018