Nestlé reported a decent set of results. 1Q19 core net profit of RM239m (+6% yoy) came in within both our and street’s expectations, accounting for 33% of full-year estimates. Top-line grew 2% yoy predominantly on the back of higher domestic sales, while margins also improved on supply chain efficiency gains alongside tapering of A&P spend in 1Q19. We maintain our earnings forecasts as well as our SELL call on Nestlé at this juncture, pending the results briefing by management.

Within Expectations

1Q19 core earnings grew 6.0% yoy to RM238.9m as: (i) revenue increased by 1.6% yoy to RM1.45bn (+3.2% yoy after adjusting for divestment of the chilled dairy business on 1st January 2019), underpinned by higher domestic sales (+4.9% yoy) on the back of commendable sales performance during the Chinese New Year festivities; (ii) operating margin improved +1.6 ppts yoy, led by supply chain efficiency gains and phasing of marketing and promotional expenses, while offset by a higher effective tax rate following the cessation of outstanding tax incentives. Overall, the results were broadly within both our and consensus expectations (33% of 2019E), as we note that 1Q earnings typically account for 32-36% of Nestlé’s full-year results.

Decent Performance Despite Moderating Consumer Sentiment

Nestlé’s robust domestic sales performance was sustained despite another decline in local consumer sentiment (1Q19 MIERCSI: 85.6pt; 4Q18: 96.8pt), underlining the company’s defensive earnings over fluctuating market conditions. Going forward, we continue to expect a still-positive local macro environment to support Nestlé’s domestic growth prospects. Yet, we remain cautious of an uptick in raw material prices, which could weigh on margins, while there could be some volatility in demand arising from Nestlé’s export markets (~22% of group turnover), in our view.

Maintain SELL Call and TP

We maintain our earnings forecasts for now pending the results briefing tomorrow by the management as well as model upkeep after the recently released annual report. For now, we maintain our SELL rating and DCFderived target price of RM99.70 (implying 2019E PE of 32.6x). Upside risks: (i) less competitive environment in the F&B space; (ii) sharp decline in raw material costs; (iii) better-than-expected take-up of new products.

Source: Affin Hwang Research - 24 Apr 2019