9M19 Results In-line

Nestlé’s 9M19 results came in within both market and our expectations. Core net profit and revenue growth were relatively flat, with higher domestic sales offsetting some softness in exports demand. The EBIT margin held up in spite of cost pressures from forex and raw material price fluctuations due to improved operational efficiencies. Maintain HOLD on Nestlé with an unchanged target price of RM137.00.

Within Expectations

Nestlé reported 9M19 organic revenue growth (adjusted for its chilled dairy business divestment) of 2.1%, driven by robust domestic sales growth (+4.6% yoy pre-divestment) as its new product launches continued to have solid reception. This was partially dampened by weaker export sales which nonetheless account for only c.20% of group turnover. Although unfavourable forex and commodity price movements weighed on the gross margin (-1.2ppts), the EBIT margin nonetheless stayed firm as management continued to drive operating efficiency gains. All in, the 9M19 core net profit (- 0.5% yoy) of RM536m was within both market and our expectations, accounting for 76% and 79% of full-year estimates respectively. A DPS of 70sen was proposed for the quarter (3Q18: 70sen).

Sequentially Stronger

Core net profit grew 8.6% qoq in 3Q19 in tandem with higher revenue growth of 4.9% qoq, reflecting the group’s resilient domestic sales performance. Moving into 4Q19, management remains committed to upholding the group’s margins through further opex savings, while banking on new product launches under the NESCAFE, MILO and DRUMSTICK brands to continue driving sales growth.

Maintain HOLD, Price Target Unchanged at RM137.00

As the results were broadly in line with our expectations, we leave our earnings estimates unchanged. Maintain HOLD, with an unchanged DCFderived 2020E TP of RM137.00. Upside/downside risks: (i) less/more competitive environment in the F&B space; (ii) sharp decline/increase in raw material costs; and (iii) better/lower-than-expected reception of new products

Source: Affin Hwang Research - 13 Nov 2019