• Nestle’s 9MFY18 net profit of RM535.1m was in-line with ours and consensus estimates of 73% and 75% respectively.

• 9MFY18 revenue grew 4.8% yoy driven by higher domestic sales and increase in export business.

• An interim dividend of 70sen (vs 3Q17: 70sen) was declared.

• We maintain our Hold recommendation with a TP of RM152.00 based on DDM valuation (WACC: 6.5%).

Earnings rose as expected

Nestle’s 9M18 net profit grew 4.7% to RM535.1m, which met our full year forecast, i.e. making up 73% of our FY18 forecast. EBIT margin increased slightly by 50bps from 16.9% to 17.4% during the same period. The expansion in margin is due to favourable price trend in major raw materials. On qoq basis net profit fell 17.1% to RM137.7m in 3Q18, due to marketing investments, i.e. Nestle usually records higher investments in the third quarter compared to 2Q of the year.

Revenue saw higher growth

Revenue in 3Q18 grew 8.3% yoy to RM1,432.5m, and is up 9.4% qoq. The improvement in both comparison periods was driven by higher domestic and export sales. Domestic sales growth was attributed to increased sales during 0% GST implementation period in June–Aug 2018. In addition, launch of new products and strong consumer spending contributed to the growth. According to the company, the new product lines such as Maggi Pedas Giler, MILO 3 in 1 less sugar, as well as the new NESCAFE Cold Brew has set a solid base for growth for the year.

Dividend declared

An interim DPS of 70 sen (3Q17: 70sen) was declared. Dividend declared and paid YTD is 140sen. We estimate full year DPS of 300sen, compared to 275sen in 2017, translating into dividend yield of 2.1%.

Neutral outlook

According to the company, they are committed to continue on product innovations and enhancing their strong brand portfolio. We expect the new Nestle Distribution Centre and recent investment in MILO manufacturing facility to help sustain Nestle’s growth momentum. However, global uncertainties may place pressure on Nestle’s margins in the face of a weakening ringgit against the USD.

Maintain HOLD with TP of RM152.00

No adjustment is made to our earnings forecast. We retain our HOLD recommendation with a DDM-derived TP of RM152. We believe this is fair valuation, which is based on WACC of 6.5%.

Source: BIMB Securities Research - 30 Oct 2018