2Q19 core PAT of RM142.3m (QoQ: -40.4%, YoY: -15.0%) brought 1H19 core PAT to RM381.2m (YoY: -2.6%). This was in line, making up 51.7% and 52.7% of ours and consensus full year estimates, respectively. Our forecasts remain unchanged. We maintain our SELL call and unchanged TP of RM111.00 based on DDM valuation methodology (r: 6.8%, TG: 3.5%).

In line. 2Q19 core PAT of RM142.3m (QoQ: -40.4%, YoY: -15.0%) brought 1H19 core PAT to RM381.2m (YoY: -2.6%). This was in line, making up 51.7% and 52.7% of ours and consensus full year estimates, respectively. Note that the 1H19 core PAT sum has been arrived at after subtracting RM19.7m in one-off gain from the divestment of the Petaling Jaya factory and manufacturing business in relation to the chilled dairy business, cold sauces and packing of milk powders to Lactalis.

Dividend. DPS of 70 sen (2Q18: 70 sen) was declared, going ex on 13 Sept. 1H19 DPS amounted 70 sen vs 1H18’s 70 sen.

QoQ. Sales declined 8.1% due to seasonality, as sales are typically strong during Chinese New Year period in 1Q. While sales declined 8.1%, core PAT fell by a larger magnitude of 40.4%. This was due to (i) phasing of commercial spend (Nestle typically incur less A&P expenses in 1Q); (ii) one-off warehousing expenses in preparation for the factory expansion in Chembong; and (iii) slightly higher cost of commodities.

YoY. Revenue grew 2.0% to RM1,335.7m. Excluding the chilled dairy Business (which was divested in Jan 2019), top line grew 3.4% driven by domestic sales of 6.8%. Robust domestic sales growth was driven by successful marketing efforts, particularly around new product launches (Nescafe Gold Jar relaunch, Maggi Pedas Giler 2X Ayam Bakar, Maggi Pedas Giler Seafood, La Cremia Summer Berries Yoghurt Ice Cream and Kit Kat Popcorn flavour). Despite better top line, core PAT decreased by 15.0% due to warehousing expenses as mentioned above.

YTD. Higher turnover of 1.8% (+3.5% after adjusting for divestment of chilled dairy business) was due to better domestic sales of 4.1% (+6.1% net of chilled dairy divestment) from successful rollout of new products mentioned above. Despite higher sales, core PAT declined marginally by 2.6% due to slightly higher effective tax rate which arose from the expiration of Nestle’s investment incentive.

Outlook. Nestle will continue to drive sales growth with the introduction of innovative new products to capture consumer’s imagination. We expect Nestle’s tax rate to remain at current levels (circa 23.0%) as their tax incentive (linked to halal food production) expired in FY18. Note that between FY15 to FY17, Nestle posted an average effective tax rate of 19%.

Forecast. Unchanged.

Maintain SELL. We maintain our SELL call and unchanged TP of RM111.00 based on DDM valuation methodology (r: 6.8%, TG: 3.5%). At current price, Nestle is trading at 46.8x FY19 P/E and yielding an unattractive 2.1%. In comparison, its holding-co in Switzerland trades at a cheaper 24.4x FY19 P/E while its sister-co in Nigeria trades at 19.0x FY19 P/E.

Source: Hong Leong Investment Bank Research - 28 Aug 2019