Results

• In-Line – Reported 6M17 PAT of RM392.5m (-4.1% yoy) which accounted for 55% and 59% of HLIB and consensus full-year forecasts respectively. We deem the results within expectations, as the first half of the year historically accounts for between 55%-60% of full year earnings.

Deviations

• Largely in line.

Dividends

• Declared dividend per share of 70 sen was within our expectations.

Highlights

• Yoy: 2Q17 revenue grew 3.8% to RM1.28bn due to higher domestic sales volume (+4.7%) and exports (+3.6%). However, PAT declined by 14.2% to RM162.1m due to higher cost of key commodities (coffee beans, milk powder and palm oil).
• Qoq: Revenue declined by 6.4% to RM1.28bn, while PAT dived 29.7% to RM162.1m (from RM230.7m in 1Q17) due mainly to seasonality.
• YTD: Revenue was 4.1% higher at RM 2.66bn. Despite the steep increase in COGS (witnessed by a decline in gross profit margin, which slid from 41.4% to 38.3%), internal efficiency measures saw operating profit grow 0.7% to RM519.2m. Despite this, PAT declined by 4.1% to RM392.5m mainly due to the higher effective tax rate.
• Product launches in 6M17: MAGGI Hot Mealz, MILO "KAW", KIT KAT Mini and MAT KOOL Panda Ice Cream.
• Outlook: We expect Nestle to continue riding on the improving consumer sentiment domestically. The governments RM5,000 cash handouts to 95,000 FELDA settlers and BR1M payments in August are expected to stimulate consumer spending. However, rising cost of key commodities may raise input costs going forward as a portion of the group’s hedges rolls over.

Risks

• Prolonged depressed consumer sentiment; strong competition especially in the instant coffee segment; jeopardy of its Halal certification.

Forecasts

• Unchanged pending analyst briefing later this week.

Rating

HOLD ↔

• We believe Nestle warrants a HOLD call as it is fully valued at the current price. Investors should have Nestle in their portfolio on the back of its defensive nature and as a proxy to Malaysia’s recovery in consumption growth.

Valuation

• Maintain our HOLD call with an unchanged TP of RM85.73 based on DDM (WACC: 7.8%; TG: 3%).

Source: Hong Leong Investment Bank Research - 22 Aug 2017