Nestlé’s reported 2018 core net profit of RM682m (+9% yoy) fell short of our expectation but tracked with consensus, accounting for 89% and 96% of full-year estimates respectively. Nestlé’s 2018’s performance was driven by: (i) +5% yoy revenue growth underpinned by both higher domestic and export sales, and (ii) margin improvements on more favourable raw-material costs alongside supply-chain efficiency gains. While prospects continue to look positive for Nestlé, we believe the stock is still trading ahead of fundamentals, and therefore we maintain our SELL call with a lower TP of RM99.70.

2018 – Missed Expectations

Nestlé’s 2018 results’ variation against our forecast arose from higher-thanexpected A&P expenses and taxes incurred in 4Q18. Overall, 2018’s core earnings of RM681.6m (+9.2% yoy) was driven by higher revenue of RM5.52bn (+4.9% yoy), underpinned by higher domestic spending amid improved consumer sentiment, as well as higher export sales, with a strong reception garnered for the new products (MAGGI Pedas Giler, NESCAFÉ Cold Brew, etc) launched during the year. Operating margins also improved by 1.2ppts yoy due to relatively cheaper raw-material prices, while partially offset by start-up costs from relocation to the new National Distribution Centre (NDC) in 2Q18, as well as higher sales and marketing expenses. A final DPS of 140sen was declared, amounting to full-year DPS of 280sen (2017: 275sen).

Outlook Remains Positive, in Spite of Some Headwinds

Although consumer sentiment appears to have moderated in 4Q18 (MIERCSI: 96.8pt; Nielsen CCI: 104.1pt), we believe the macro backdrop (stable inflation and unemployment rate) overall remains supportive of Nestlé’s prospects, while the response has been encouraging for the group’s new product offerings. On the other hand, an uptick in raw-material prices seen for 2019 should be mitigated by a strengthening RM and further operating efficiency gains, in our view.

Maintain SELL With a Revised TP of RM99.70

We trim our EPS estimates by -8.4%/-9.6% to account for a higher taxation rate and adjustment to margins. Subsequently, we maintain our SELL recommendation on Nestlé with a lower DCF-derived target price of RM99.70 (from RM111), mainly due to the stock’s stretched valuations (implied PER of 49x 2019E core EPS). Upside risks: less competitive environment in the F&B space; sharp decline in raw-material costs.

Source: Affin Hwang Research - 27 Feb 2019