Nestlé’s 1H18 core earnings fell within our and consensus estimates (54% and 56% respectively). 1H18 core net profit growth of 9.9% yoy was driven by revenue growth and better margins arising from lower raw material prices and economies of scale despite one-off relocation costs to the new National Distribution Centre (NDC). While prospects continue to look favourable for Nestlé, we believe its share price performance has run ahead of fundaments and thus maintain our SELL call with a revised 12-month DCF-derived TP of RM100.82.

1H18 Within Expectations

Nestlé’s 1H18 earnings came in within expectations at 54% and 56% of our and consensus estimates respectively. The 9.9% yoy increase in the 1H18 core profit was driven by better revenue (+3.1% yoy) during 1H18 on the back of stronger sales in both the domestic and export markets, especially during festive seasons. The introduction of new products during 1H18 such as MAGGI Pedas Giler, KIT KAT Green Tea and NESTUM Kurma & Prun also provided impetus for sales growth during the quarter. Although there was a one-off cost arising from the relocation to the new NDC in 2Q18, we believe that the operating cost increase was adequately negated by stronger revenue growth and also lower raw material costs in 1H18 compared to 1H17. An interim DPS of 70 sen was declared.

Forecasting Revenue and Margin Expansion in 2018E

As we have seen key raw material prices trending downwards for most of the year, coupled with our in-house view of a strengthening Ringgit, we are forecasting the EBITDA margin to improve to 19.4% in FY18 compared to 18.5% in FY17. In addition, our top line growth forecast of 8% is supported by Nestlé’s product development capabilities and strong branding. With the MIER Consumer Sentiments Index reaching a multi-year high of 132.9 in 2Q18, we believe demand for Nestlé’s products will continue to remain solid.

Maintain SELL With a Revised TP of RM100.82

We leave our EPS estimates unchanged, and maintain our SELL rating but with a slightly higher DCF-derived target price of RM100.82 (implying a PER of 30x FY19E EPS), as we roll forward our valuation to FY19E. Although we are positive on Nestlé’s defensiveness and growth, we believe that valuations are still overstretched, currently trading at 43x FY19E EPS (+2.8SD 5-year mean PE). Upside risks: less competitive environment in the F&B space; sharp decline in raw material costs.

Source: Affin Hwang Research - 15 Aug 2018