• Overview. 2Q19 net profit declined 5.6% yoy to RM157m as higher cost dragged the earnings lower. On qoq basis, earnings declined 33% mainly due to lower revenue as a result of seasonal factor and 19% increase in operating expenses of RM295m.

• Key highlights. Although revenue increased 2% to RM1.34b on 6.8% growth in domestic sales, profitability has been impacted by the commercial spending and some one-off warehousing expenses in preparation for the factory expansion in Chembong, as well as slightly higher cost of commodities.

• Against estimates: inline. 1H19 net profit was in line, making up 50% of our full year forecast. PBT increased slightly to RM511.9m from RM509.2m in 1H18 due to one-off gain recognized on divestment of the Petaling Jaya factory and the manufacturing business in relation to chilled dairy products, cold sauces and packing of milk powders amounting RM19.7m.

• Dividend. An interim DPS of 70 sen (1H18: 70 sen/share) was declared, payable on 10 Oct 2019. We expect a DPS of RM3.40 for FY19, translating into dividend yield of 2.3% at current price.

• Outlook. Despite the volatility in commodities prices and uncertainties in global economics environment, we believe Nestle being one of the world’s largest commodity purchasers and F&B producers are able to minimise the unfavourable impact, if any. Meanwhile financial leverage is manageable with net gearing of 0.5x as at June 2019 with decent cash/share of RM1.91.

• Our call. Maintain HOLD with DDM-derived TP of RM152 based on WACC of 6.5%, as we believe fundamentals have been well reflected.

Source: BIMB Securities Research - 27 Aug 2019