Following Nestlé’s results briefing, we expect another record earnings performance in 2019 for the company. We are now more convinced of its sturdy long-term growth prospects, while taking note of its defensive earnings momentum historically. As such, we upgrade Nestlé to HOLD (from Sell) with a new DCF-derived TP of RM138.20, after applying a lower discount rate and rolling forward our valuation base to 2020E.

A Solid Start to the Year

To recap, Nestlé’s 1Q19 earnings (+6% yoy) came in within expectations, primarily driven by top-line growth (+3.2% yoy after adjusting for divestment of its chilled dairy business) and a further +1.6ppts yoy improvement in operating margins. Strong domestic sales (+4.9% yoy) took the spotlight during the quarter, attributed to robust demand for various product categories especially over the LNY period. During the quarter, Nestlé also made further inroads into e-commerce (one of management’s key priorities) through a maiden partnership with Shopee on a Super Brand Day promotion launched at the end of March.

Outlook Remains Resilient

In our view, Nestlé’s outlook remains sturdy in spite of the decline in consumer sentiment over recent quarters, given its dominant local branding alongside strong traction for its recent new product offerings. New products launched in 1Q19 include MAGGI Pedas Giler 2X Ayam Bakar, MILO with Whole Grain Cereal, and Nestum Brown Rice. Nestlé’s positive traction in the local market (c.80% of sales) should mitigate shortterm fluctuations on the exports front, while margins should be supported by continuous efficiency improvements on its operations. Meanwhile, rawmaterial prices have remained stable overall, and management has taken the opportunity to lock in unit costs over the near term. Management also further clarified on the imminent sugar-tax implementation, whereby only a small number of SKUs would be affected by the regulation.

Upgrade to HOLD

We tweak our 2019-21E EPS estimates by -0.9%/-0.7%/-0.7% respectively on model upkeep after Nestlé’s annual report release, and also after obtaining further clarity from the briefing. We also raise our DCF-derived TP to RM138.20 upon rolling forward to a 2020E valuation base, and with a lower WACC of 6.8% (TG: 3.5%). Thus we upgrade Nestlé to a HOLD from Sell, with the view that the stock deserves a premium valuation (implied 2019E core PER of 45.6x) due to the company’s proven track record and earnings defensibility. Upside/downside risks: (i) surge/dip in local consumer spending; (ii) decline/uptick in secured raw-material prices; and (iii) higher/lower demand for new products.

Source: Affin Hwang Research - 25 Apr 2019