Nestlé’s 6M19 results were below market and our expectations. Core net profit dipped 3% yoy, despite a 2% yoy growth in revenue, which was offset by higher raw-material costs and one-off warehousing expenses related to the expansion of its Chembong factory. We maintain our estimates, RM138.20 target price and HOLD rating, which are subject to review, as we await further guidance from management following the upcoming results briefing.

Below Expectations Due to Higher Raw-material Costs

After normalising for the divestment of its chilled dairy business, revenue grew 3.5% yoy in 6M19, driven by higher domestic sales (+6.1% yoy) over the festive Lunar New Year and Eid festivities. However, this was offset by higher raw-material costs due to an uptick in commodity prices alongside the weaker Ringgit, coupled with some one-off warehousing expenses incurred for the expansion of its factory in Chembong, which resulted in core net profit dipping by 3.4% yoy. Overall, 6M19’s results appeared below market and our expectations, accounting for 53% and 54% of FY19 estimates, in contrast to the typical 1H historical trend which usually accounts for c.60% of full-year earnings. DPS of 70sen was proposed for the quarter (2Q18: 70sen).

Qoq Weaker Due to a Seasonally Strong 1Q19; EBIT Margin Slipped

2Q19’s revenue was sequentially lower (-8.1% qoq) as 1Q19 was seasonally stronger driven by the Lunar New Year festive sales. EBIT margin fell by a marked 7.9 ppts to 14.5% due to the aforementioned reasons, alongside timing of A&P expenses. Going forward, management intends to mitigate the margin pressure through operational efficiency gains, while continuing to ramp up its new product launches, including the recent “Starbucks At Home” coffee range.

Maintain HOLD; Price Target Unchanged at RM138.20

We leave our earnings estimates unchanged, pending a next-day briefing with the company’s management. Maintain HOLD, with an unchanged DCFderived 2020E TP of RM138.20. Upside/downside risks: (i) less/more competitive environment in the F&B space; (ii) sharp decline/uptick in rawmaterial costs; and (iii) better/lower-than-expected reception of new products.

Source: Affin Hwang Research - 28 Aug 2019