Results

• Below our expectation – Reported FY17 PAT of RM645.8m (-1.4% YoY) was below ours but in line with consensus FY estimates at 92.1% and 98.2%, respectively.

Deviations

• Higher-than-expected effective tax rate, higher-than-expected raw material costs.

Dividends

• Declared dividend per share of 135 sen was within our expectations (4Q16: 130 sen) going ex on 11/5/18. Total dividend for FY17 amounted to 275 sen, in line with our expectation (FY16: 270 sen).

Highlights

• QoQ: 4Q17 revenue dipped 3.1% to RM1.28bn, but PAT rose 11.5% to RM133.5m (from RM119.7m in 3Q17) due to lower cost of sales and higher marketing spend.

• YoY: 4Q17 revenue grew 2.5% to RM1.28bn from RM1.25bn thanks to higher domestic sales (+4.5%) in spite of weaker export sales (-3.2%). PAT nearly doubled RM133.5m (from RM66.9m) as a result of higher marketing spending in 4Q16 in preparation of the earlier timing of CNY in 2017.

• YTD: Revenue was 3.9% higher at RM5.26bn, while PAT grew 1.4% in tandem to RM645.8m. Better cost management partially offset higher tax rate and increased raw material costs.

• Product launches in FY17: MAT KOOL Fruity Bugz, NESCAFE Black Ice, MILO Nutri-up, MAGGI Hot Mealz and NESTUM Mango Tango.

• 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 Budget 2018 announcement are expected to spur consumer spending which should benefit Nestle.

Risks

• Strong competition especially in the instant coffee segment.

Forecasts

• Unchanged pending analyst briefing on 22/2/18.

Rating

HOLD ↔

• Nestle is well positioned to benefit from recovering consumer spending in 2018 in light of pre-election cash handouts. We like Nestle due to its defensive nature, diversified product portfolio and stellar management. Despite this, it must be noted that at current price levels, DY has slipped to 2.7% from between 3.5%-4.0% over the past five years.

Valuation

• Maintain our HOLD call pending the analyst briefing on 22/2/18 with an unchanged TP of RM85.18 based on DDM (WACC: 7.8%; TG: 3%).

Source: Hong Leong Investment Bank Research - 21 Feb 2018