• Overview. 3Q19 net profit increased 8.2% yoy to RM149m as margins improved on lower operating expenses and lower effective tax rate. On qoq basis, earnings declined 5% mainly due to planned phasing of commercial spending and absence of one-off gain as incurred in 2Q19 on divestment of Petaling Jaya factory and manufacturing business.

• Key highlights. Despite the subdued consumer sentiment, Nestle’s domestic sales remained solid with sales expanding 2.6% during the nine-month period. Nonetheless, profitability has been impacted by the planned phasing of the commercial spending and slightly higher cost of commodities.

• Against estimates: below. 9M19 net profit was below, making up 68% of our full year forecast. PBT increased slightly to RM703.6m from RM696.0m in 9M18 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 70sen (3Q18: 70sen/share) was declared, bringing total DPS declared to-date of 140sen (9M18: 140sen/share).

• Outlook. Given challenging business environment on stiff market competition and volatile raw materials prices, we tweaked our FY19 earnings forecast lower by 5% to RM749.7m as we adjusted our cost of sales higher by 2% to RM3.65b from RM3.60b previously. Nevertheless, we still believe that the company’s strong brand name, aided by its continued efforts in enhancing efficiencies and generating savings to invest in brand equity would protect margins and minimise any unfavourable impact.

• 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 - 12 Nov 2019