Nestlé’s 9M18 core earnings fell within our and consensus estimates (72% and 77% of FY18 estimates, respectively). Key earnings drivers were revenue growth (+5% yoy), which was underpinned by improved consumer sentiments and strong demand for new products launched as well as margin improvements on more favourable raw material costs. While prospects continue to look favourable for Nestlé, we believe its share price performance has run ahead of fundamentals and thus maintain our SELL call and 12-month DCF-derived TP of RM111.00.

9M18 Within Expectations

Nestlé’s 9M18 core earnings came in within expectations accounting for 72% and 77% of our and consensus FY18 estimates, respectively. The increase in core net profit was driven by revenue growth (+5% yoy), arising from improved consumer sentiments and favourable response to the new products launched during the year. This was also supported by margin improvements due to relatively better raw material prices on a yoy basis, but was offset slightly by one-time start-up costs due to relocation to the new National Distribution Centre (NDC) in 2Q18, as well as slightly higher sales and marketing expenses. An interim DPS of 70 sen was declared.

QoQ Growth Affected by Higher Operating Expenses

Despite recording a strong 9% revenue growth on a qoq basis, Nestle’s 3QFY18 earnings were affected by higher operating expenses on a qoq basis, which we believe was due to increased marketing and promotional activities during the quarter. We also understand that there was a slight timing delay during the ramp-up of the new NDC which caused some sales from 2Q18 to only be fulfilled in July (3Q18), which we believe partly explains the high revenue growth.

Maintain SELL With An Unchanged TP of RM111

We leave our EPS estimates unchanged, pending further updates from the results briefing. We also maintain our SELL rating with an unchanged DCFderived target price of RM111.00 (implying a PER of 33x FY19E core EPS). Our SELL call is mainly premised on valuation grounds, despite our view that Nestle’s earnings should continue to remain resilient going forward. Upside risks: less competitive environment in the F&B space; sharp decline in raw material costs.

Source: Affin Hwang Research - 31 Oct 2018