Reported 9M18 core PAT of RM535.1m was below ours and consensus expectations at 73.2% and 74.5% respectively. The poorer than expected performance was due to slower than expected top line growth. We reduce our FY18/19/20 forecasts by 2.8/2.8/4.0% to account for slower sales growth. SELL call is maintained with a lower TP of RM109.10 (from RM112.30) based on unchanged DDM valuation methodology (r: 6.8%, TG: 3.5%).

Below expectations. 9M18 core PAT of RM535.1m was below ours and consensus expectations at 73.2% and 74.5% respectively. We deem this below expectations as 4Q is seasonally a significantly weaker quarter due to a disproportionate amount of marketing spend being booked in 4Q. The poorer than expected performance was due to slower than expected top line growth (we previously expected a bumper quarter from sales tax holiday and rebounding consumer sentiment).

Dividend. Declared dividend per share of 70 sen was within our expectation (3Q17: 70 sen) going ex on 16/11/18.

QoQ. Top line growth of 9.4% to RM1,432.5m was due to better consumer confidence during sales tax holiday period between June and August. However decreased bottom line of RM137.7m (-17.1%) was due to timing of marketing spend (Nestle usually incurs higher marketing expenses in 3Q vs 2Q).

YoY. Robust A&P spending (which fuelled top line growth) and sales tax holiday during 3Q18 resulted in top line growth of 8.3%. Better margins were a result of favourable raw material prices and increased supply chain efficiencies. Better top line and margin expansion resulted in core PAT growth of 15.7%.

YTD. Core PAT growth of 4.7% was in tandem with revenue increase of 4.8%. The group attributed the better performance to improved consumer sentiment as well as the successful launches of new products (Maggi Pedas Giler, Milo 3-in-1 less sugar, Nescafe Cold Brew and Tropicana Lychee Yoghurt flavour ice cream).

Outlook: Nestle will continue to invest in enhancing their brand portfolio and look to increase cost efficiencies. The recently announced RM100m in the Milo Chembong Factory and relocation to a new National Distribution Centre (also the group’s largest in Asia) underline Nestle’s commitment to sustainable growth.

Forecast. We reduce our FY18/19/20 forecasts by 2.8/2.8/4.0% to account for slower sales growth.

Maintain SELL. Despite favourable domestic consumption indicators, we maintain our SELL call as we feel that valuations are unjustifiably rich. At current price, Nestle is trading at 47.3x FY18 P/E and yielding an unattractive 2.1%. In comparison, its holding-co in Switzerland trades at 21.6x FY18 P/E while its sister-co in Nigeria trades at 25.1x P/E. After incorporating our forecast changes, we maintain our SELL call with a lower TP of RM109.10 (from RM112.30) based on unchanged DDM valuation methodology (r: 6.8%, TG: 3.5%).

Source: Hong Leong Investment Bank Research - 31 Oct 2018