We attended Nestle’s 2Q18 results briefing which yielded no major surprises. Nestle shared that they will not look to increase prices at the onset of SST implementation. Nestle shared they do not expect to see any increase in staff cost from a potential minimum wage hike. Despite this, we maintain our SELL call on the back of unchanged DDM based TP of RM112.30 as we opine that its valuation is too rich. Nestle currently trades at 47.0x FY18 P/E compared to its parent-co (Switzerland) at 21.0x and sister-co (Nigeria) at 27.6x.

We Attended Nestle’s 2Q18 Results Briefing Which Yielded No Major Surprises.

Migration to SST regime. Nestle shared they will not look to increase prices at the onset of SST implementation. Additionally, many of Nestle’s products are expected to be exempted from sales tax, such as noodles (Maggi) and coffee (Nescafe).

Minimum wage impact. Nestle shared they do not expect to see any increase in staff costs from a potential minimum wage hike as they do not have any employees currently on minimum wage. We expect a hike in minimum wage to benefit Nestle as higher disposable income for consumers should result in better sales for the group.

Sales outlook. We expect better top line in 2H18 vs 1H18 due to (1) sales tax holiday between June and September; and (2) launch of new products which has been well received by consumers (e.g. Nescafe Cold Brew). Advertising and promotional expenses are expected to increase in 2H18 to fuel the growth in new products, which is expected to account for over 10% of total sales in FY18 (vs historical run rate of ~10%).

Forecast. Unchanged.

Maintain SELL. Despite favourable domestic consumption indicators (sales tax holiday and rebounding consuming sentiment), we maintain our SELL call as we feel that valuation is unjustifiably rich. At current price, Nestle is trading at 47.0x FY18 P/E and yielding an unattractive 2.1% in dividend. In comparison, its holding-co in Switzerland trades at 21.0x FY18 P/E while its sister-co in Nigeria trades at 27.6x FY18 P/E. We opine that Nestle’s entry into the MSCI and KLCI index in late-2017 may have forcefully inflated its share price due to accumulation from index tracking funds. We maintain our TP of RM112.30 based on DDM valuation methodology (r: 6.8%, TG: 3.5%).

Source: Hong Leong Investment Bank Research - 16 Aug 2018