Nestle’s 1Q18 net profit was broadly in line with our and consensus estimates, despite recording a flat +0.2% yoy growth. Excluding forex gains and other EI, core net profit grew by 5.8% yoy. As expected, we saw some EBIT margin improvement qoq, owing to more favourable raw material prices and lower operating expenses. Nonetheless, we are still of the view that valuations are overstretched (currently trading at 46x 2018E EPS) Maintain our SELL rating with an unchanged TP of RM97.60.

1Q18 Net Profit Flat Yoy, in Line With Expectations

Nestle recorded a 1Q18 net profit of RM231.2m (+0.2% yoy, +73.1% qoq). Despite showing a relatively soft start to the year, net profit came in broadly in line with our and consensus estimates (made up 30.8% and 32.1% of full year estimates respectively). The first quarter is seasonally stronger, typically accounting around for 32-35% of full year earnings historically. On the other hand, core net profit improved by 5.8% yoy after accounting for extraordinary items including higher net foreign exchange gains recorded in 1Q17. Revenue grew a decent 4.2% yoy and 11.5% qoq, underpinned by higher domestic (+4.4%) and export (+3.4%) sales, which also included the Chinese New Year festive period. This is also in line with the observed improving consumer sentiments compared to 1Q17.

Sequential EBIT Margin Improvement

Nestle’s EBIT margin improved by 6.8ppts qoq to 20.8% in 1Q18 vs 14.0% in 4Q17), underpinned by 21% increase in gross profit coupled with a 11% decline in operating expenses. This was mainly due to the decline in key raw materials’ prices in 2H17, with the impact usually lagging by 4-6 months, due to hedging contracts. Furthermore, we believe the appreciation of RM against USD should benefit Nestle in 1Q18 and the subsequent quarters through lower imported costs.

Maintain SELL With An Unchanged TP of RM97.60

We leave our EPS estimates unchanged, and maintain our SELL rating on Nestle with a DCF-derived target price of RM97.60, implying a PE of 30x 2018E EPS. Although we are positive on Nestle’s defensiveness and margin improvements, we believe that valuations are overstretched, currently trading at 46x 2018E EPS. Upside risks: less competitive environment in the F&B space.

Source: Affin Hwang Research - 25 Apr 2018