FY18 core PAT of RM 648.5m was below ours and consensus expectations, accounting for just 91.3% and 91.7% respectively. The poorer than expected results were due to weaker than expected top line growth and higher than expected effective tax rate. We keep our forecasts unchanged pending the briefing later today. We maintain our SELL call with an unchanged TP of RM109.10, based on an unchanged DDM valuation methodology (r: 6.8%, TG: 3.5%).

Below expectations. FY18 core PAT of RM648.5m was below ours and consensus expectations, accounting for just 91.3% and 91.7% respectively. The poorer than expected results were due to weaker than expected revenue growth and higher than expected effective tax rate.

Dividend. Declared dividend per share of 140 sen going ex on 7/5/2019 brought full year dividend to 280 sen. (4Q17: 135 sen, FY18: 275 sen)

QoQ. Core PAT declined 12.2%% to RM120.2m. The decline in profitability was due to (i) seasonality as 4Q is usually the weakest quarter and (ii) inflated 3Q18 sales from sales tax holiday from June to August 2018.

YoY. Sales grew 5.2% to RM1,347.9m of the back off higher domestic (+11.9%) and export sales (+3.1%). Despite Nestle experiencing favourable commodity prices and supply chain efficiencies, core PAT declined 2.0%. Lower core PAT was mainly due to higher effective tax rate from the ending of Nestle’s tax incentive (4Q18 effective tax rate: 31.2% vs 4Q17: 21.0%) as well as higher advertising and promotional spending.

YTD. Nestle attributed top line growth of 4.9% to successful product launches in FY18 (Maggi Pedas Giler, Tropicana Lychee Yoghurt Ice Cream, OREO Ice Cream, Milo 3- in-1 Less Sugar, KIT KAT Duo Milk, Nescafe Cold Brew). Despite better gross profit margin of 38.7% (vs 37.1% in FY17), higher effective tax rate (FY18: 24.8% vs FY17: 20.9%) from the expiry of tax incentives resulted in bottom line growth of just 2.1%.

Outlook: Nestle will continue to invest in enhancing their brand portfolio and look to increase cost efficiencies. However, we expect Nestle to face headwinds in FY19 from higher commodity prices and more volatile demand in their export markets. Additionally, we expect Nestle’s tax rate to remain at current levels as their tax incentive (linked to halal food production) expired in FY18.

Forecast. We keep our forecasts unchanged pending the briefing later today.

Maintain SELL. At current price, Nestle is trading at 47.1x FY19 P/E and yielding an unattractive 2.1%. In comparison, its holding-co in Switzerland trades at 21.0x FY19 P/E while its sister-co in Nigeria trades at 24.3x FY19 P/E. We maintain our SELL call with an unchanged TP of RM109.10, based on an unchanged DDM valuation methodology (r: 6.8%, TG: 3.5%).

Source: Hong Leong Investment Bank Research - 27 Feb 2019