We attended Nestle’s 1QFY19 results briefing and came away feeling neutral on the group’s prospects going forward. Nestle continues to view price increase as an act of last resort. Instead, we expect the group to grow profitability by introduction of new products and finding operational cost synergies in production and logistics. We maintain our SELL call and TP of RM111.00 based on an unchanged DDM valuation methodology (r: 6.8%, TG: 3.5%).

We attended Nestle’s 1QFY19 results briefing and came away feeling neutral on the group’s prospects going forward.

Introduction of new products expected to spur growth. We expect Nestle to continue to introduce new product offerings to refresh their product portfolio. Note that historically, newly launched products account for 8-10% of total sales. In 1Q19, new products by Nestle included Nestum (Brown Rice variant), Strawberry flavoured milk, and Maggi 2x Pedas Giler amongst others, with some of these being introduced exclusively online via an e-commerce tie-up with Shopee in conjunction with their ‘Super Brand Day’.

Flattish raw material cost expected ahead. We expect Nestle’s raw material costs to remain relatively flat in FY19 as lower coffee and palm oil prices are expected to offset other rising commodity prices such as barley and milk.

Higher capex in FY19. Nestle expects to incur approximately RM220m capex in FY19 vs. FY18’s RM145m.The consolidation of the Milo production in Chembong, Negeri Sembilan alone will cost circa RM90m (note that Nestle will be moving Milo production from their Petaling Jaya factory to Chembong). Upon completion of the expansion, the facility is expected to be the largest Milo production facility in the world. Besides selling domestically, Nestle Malaysia also exports Milo to over 20 other countries.

Lower export sales due to phasing of sales. Nestle guided that lower export sales in 1Q19 of RM253m (-7.6%) was due to phasing of sales, and not a fundamental shift in demand. Note that in total, Nestle exports to approximately 50 countries given its reputation as a producer of halal certified products and Malaysia’s proximity to other ASEAN countries.

Outlook. Nestle continue to view price increase as an act of last resort. Instead, we expect the group to grow profitability by introducing new products and finding operational cost synergies in production and logistics.

Forecast. As the meeting yielded no surprises, we maintain our forecasts. We maintain our SELL call and TP of RM111.00 based on an unchanged DDM valuation methodology (r: 6.8%, TG: 3.5%). While we are confident that Nestle will continue to strengthen its group’s portfolio of products, we reckon the share price has risen beyond justifiable levels. At current price, Nestle is trading at 48.3x FY19 P/E and yielding an unattractive 2.2%. In comparison, its holding-co in Switzerland trades at a cheaper 22.5x FY19 P/E while its sister-co in Nigeria trades at 24.4x FY19 P/E.

Source: Hong Leong Investment Bank Research - 25 Apr 2019