• Overview. 4Q19 net profit increased 6.5% yoy to RM132m as margins improved on lower operating expenses and lower effective tax rate. On qoq basis, earnings declined 12% as revenue dropped 5% to RM1.33bn mainly due to phasing out of marketing activities on higher commercial spending and operational expenses in preparation for an early Chinese New Year in 2020.

• Key highlights. Nestle’s FY19 domestic sales remained solid with sales expanding 4.7% yoy. During the period, Nestle successfully launches the extension of the MAGGI Pedas Giler range, new Ready-to-Drink variants and the renovation of Ice Cream LA CREMERIA range.

• Against estimates: below. FY19 net profit was below, making up 90% of our full year forecast. PAT increased slightly to RM673m (+2% yoy) 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 RM20.96m.

• Dividend. A final DPS of 140sen (4Q18: 140sen/share) was declared, bringing total DPS declared to-date of 280sen (FY18: 280sen/share) translating to DY of 2.0%.

• Outlook. Given volatile trading environment on the back of regional and global uncertainties and volatile raw materials prices, we tweaked our FY20/21 earnings forecast lower by 15%/13% to RM709.6m and RM757.6m respectively; as we adjusted our revenue lower by 7% and cost of sales higher by 2%-3% to RM3.7b from RM3.6b 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 6.2%.

Source: BIMB Securities Research - 26 Feb 2020