4Q19 core PAT of RM133.3m (QoQ: -11.5%, YoY: +11.0%) brought the FY19 sum to RM665.3m (YoY: +2.6%). This was in line with ours and consensus expectations, making up 99.3% and 94.4% of full year estimates, respectively. FY19 Core PAT was arrived at after adjusting for RM12.1m forex loss and one off gain of RM19.7m from the divestment of the Petaling Jaya factory in 2Q19. We keep earnings forecasts unchanged. Our SELL call and TP of RM102.00 (based on DDM valuation methodology (r: 6.8%, TG: 3.5%) is maintaine d.

In line. 4Q19 core PAT of RM133.3m (QoQ: -11.5%, YoY: +11.0%) brought the FY19 sum to RM665.3m (YoY: +2.6%). This was in line with ours and consensus expectations, making up 99.3% and 94.4% of full year estimates, respectively. FY19 Core PAT was arrived at after adjusting for RM12.1m forex loss and one-off gain of RM19.7m from the divestment of the Petaling Jaya factory in 2Q19.

Dividend. DPS of 140 sen (4Q18: 140 sen) was declared, going ex on 14 Apr. FY19 DPS amounted to 280 sen (unchanged YoY). This was in line with our expectations.

QoQ. Core PAT declined -11.5% due to timing of marketing spend, as Nestle typically books higher A&P spending in 4Q in preparation for Chinese New Year celebrations in the following year.

YoY. Despite decent domestic sales growth (+4.7% on a like for like basis after adjusting for the divestment of the chilled dairy business), overall revenue was down - 1.4% as a result of subdued export sales, which was attributed to global uncertainty. However, core PAT rose +11.0% from better cost efficiencies.

YTD. FY19 top line was flat. This was due to the disposal of Nestle’s chilled dairy business, which came into effect on 1 Jan 2019. After adjusting for the disposal of the chilled dairy business, sales were higher by +1.6%, which was mainly driven by robust domestic sales (+4.7%). Stronger domestic sales were due to successful sales execution of innovative new products including Nescafé Tarik Kurang Manis, Milo Protein Up, Starbucks at home range and more. In spite of flat top tine, higher commodity costs and unfavourable exchange rates, core PAT was higher by 2.6%. This was due to Nestle’s continued focus on driving internal cost efficiencies.

Outlook. Nestle will continue to drive sales growth with the introduction of innovative new products, which we estimate to make up approximately 10% of total sales. Despite higher commodity costs and tepid export sales, we do not expect Nestle to raise shelf prices, particularly given the weak consumer sentiment.

Forecast. We Keep Earnings Forecasts Unchanged.

Maintain SELL. Our SELL call and TP of RM102.00 (based on DDM valuation methodology (r: 6.8%, TG: 3.5%) is maintained. At current price, Nestle is trading at 44.5x FY20 P/E and yielding an unattractive 2.2%. In comparison, its holding-co in Switzerland trades at a cheaper 22.8x FY20 P/E while its sister-co in Nigeria trades at 18.4x FY20 P/E.

Source: Hong Leong Investment Bank Research - 26 Feb 2020