Results

• Below our expectation – Reported 9M17 PAT of RM512.3m (-10.2% yoy) accounting for 71.5-76% of HLIB and consensus full-year estimates. We consider the results below our expectation as 4Q is seasonally weaker

Deviations

• Higher-than-expected raw material costs.

Dividends

• Declared dividend per share of 70 sen was within our expectations. (Ex-date: 21 Nov 2017)

Highlights

• Yoy: 3Q17 revenue grew 4.8% to RM1.32bn from RM1.26bn due to higher domestic sales volume (+4.2%) and exports (+6.8%). However, PAT declined by 25.5% to RM119.7m due to higher cost of key commodities (sugar, coffee beans and milk powder) and weaker ringgit.

• Qoq: Revenue rose 3.1% to RM1.32bn, but PAT dived 26.1% to RM119.7m (from RM162.1m in 2Q17) due higher commodity prices.

• YTD: Although revenue was 4.3% higher at RM 3.98bn, PAT declined by 4.1% to RM512.3m mainly due to higher raw material costs (which resulted in poorer gross margin (9M17: 36.9% vs 9M16: 40.4%) and higher effective tax rate.

• Product launches in 9M17: MILO Nutri-up, MAT KOOL Fruity Bug, MILO Cone, MAGGI Hot Mealz, NESTUM PET, NESCAFE Latte Hazelnut and NESCAFE Blend and Brew relaunch.

• Outlook: We expect Nestle to continue riding on the improving consumer sentiment domestically. Lower income tax, cash handouts to government servants and pensioners in 2018 amongst other measures in the recent Budget 2018 announcement are expected to spur consumer spending which should benefit Nestle.

Risks

• Strong competition especially in the instant coffee segment; jeopardy of its Halal certification.

Forecasts

• We lower our FY17 PATAMI forecast by 2% to account for higher raw material costs.

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 (in light of pre election cash handouts announced in the recent budget) and decent DY.

Valuation

• Maintain our HOLD call with a lower TP of RM85.18 from RM85.73 based on DDM (WACC: 7.8%; TG: 3%).

Source: Hong Leong Investment Bank Research - 8 Nov 2017