• Nestle’s FY18 net profit of RM658.9m was below our and consensus estimates at 90% and 93% respectively.

• FY18 revenue grew 4.9% yoy driven by higher domestic sales and increase in export business.

• An interim dividend of 140sen (vs 4Q17: 135sen) was declared.

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

Profit increased marginally due to higher tax expense

Nestle’s FY18 net profit grew 4.9% to RM658.9m, yet fell short of our expectation, i.e. making up 90% of FY18 forecast. EBIT margin increased slightly by 50bps from 16.1% to 16.6% during the same period. The increase in margin is due to favourable price trend in major raw materials. However, higher effective tax rate at 25% was recorded for the year compared to 21% previously. On qoq basis net profit fell 10% to RM123.8m, due to lower sales registered in the quarter combined with higher tax of RM56.1m, up 14.4% from 3Q18.

Revenue saw higher growth

Revenue in FY18 grew 4.9% yoy to RM5.5bn. The improvement for the year was driven by higher domestic and export sales supported by improved consumer sentiment. 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. Revenue on qoq basis however fell 5.9% mainly due to abnormally high previous 3Q revenue due to 0% GST.

Dividend declared

An interim DPS of 140 sen (4Q17: 135sen) was declared. Full year DPS is 280sen (2017: 275sen), translating into dividend yield of 1.9%.

Neutral outlook

Nestle is committed to continue on product innovations and enhancing their strong brand portfolio, according to its accompanying remarks. Following up on this, we expect the new Nestle Distribution Centre and recent investment in MILO manufacturing facility to help sustain Nestle’s growth momentum. However, Nestle also expressed concern on the volatile demand of its main exports market and possible pressure on raw material prices.

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 - 26 Feb 2019