We attended Nestle’s recent results briefing, which yielded no major surprises. However, we got some clarity on management’s future plans for the business, especially regarding the consolidation of the MILO operations at the Chembong factory in Negeri Sembilan. Management is of the view that consumer sentiment should continue to hold up and new product innovations should continue to spur topline growth, but cautioned on a possible uptick in certain key raw material prices. We retain our SELL call on valuation grounds.

9M18 Earnings Were Solid, Driven by Strong Demand

To recap, 9M18 earnings came in within expectations, primarily driven by strong demand for new product launches and margin improvements on lower raw material prices and realised efficiencies. We understand that new products such as the MAGGI Pedas Giler variety saw an overwhelming response from customers, which was also confirmed by our channel checks with certain retailers. The much improved consumer sentiment also provided steady tailwinds, and we concur with management that sentiment should continue to hold up into FY19.

Some Updates on the Disposal of the Chilled Dairy Business

We also got further clarity on the proposed disposal of Nestle’s chilled dairy business to Lactalis. The rationale for the disposal was two-fold: i) Strategically, Lactalis is better positioned to develop and grow the chilled dairy business in Malaysia, considering its strong portfolio of dairy business globally, and ii) A bulk of the sales proceeds of RM155m allows Nestle to rationalise the MILO business in an existing factory in Chembong, Negeri Sembilan, which entails the expansion of manufacturing capacity and efficiency gains, to cater to growing demand.

Outlook still looks bright, but foresee an uptick in raw material prices

We believe that the outlook remains strong for Nestle considering its strong branding in Malaysia and positive consumer sentiment, which translate into a good take-up of its new product offerings. On the flip side, moving forward, management believes that prices of some key raw materials, such as milk powder and certain grains, might increase in the near term, due to the normalisation of supply/demand dynamics globally. However, we believe that this can be mitigated by adequate hedging strategies and efficiency gains in Nestle’s operations.

Maintain SELL on Lofty Valuations, No Significant Rerating Catalysts

As the briefing did not yield any major surpises, we make no changes to our estimates. We believe the bright prospects have been more than adequately priced in, and thus retain our SELL call with an unchanged DCF-derived TP of RM111.00. Upside risks: less competitive environment in the F&B space; sharp decline in raw material prices.

Source: Affin Hwang Research - 2 Nov 2018