1Q17 net profit of RM230.4m (+4% YoY) came above our/consensus expectations due to: (i) our conservative growth estimates, and (ii) lower marketing expenses. No dividend was declared, as expected. While we made no changes for now pending further details from today’s briefing, we are positively biased stemming from effective efforts to further grow its market share on an already solid track record. Maintain MP and TP of RM80.66.

1Q17 net profit beat expectations. 1Q17 net profit of RM230.4m was above expectations, making up of 35%/34% of our/consensus estimates. The positive deviation is the result of overly conservative sales growth estimates in both domestic and export markets and lower marketing expenses incurred. No dividend was declared, as expected. The group typically does not pay dividends in the first reporting quarter.

YoY, 3M17 revenue of RM1.4b grew by 4% due to stronger sales in both domestic and export markets, attributed by effective marketing and favourable reception of new products launched. Gross profit registered at RM547.2m (+5%) with slight improvements to gross margin at 39.9% (+0.2 pts), likely from the better product mixes. Group PBT followed through with 5% growth at RM290.7m from the above with RM230.4m (+4%) recorded for net profit.

QoQ, 1Q17 top-line of RM1.4b registered a 10% growth, likely due to the Chinese New Year festive season during the quarter. Gross profits expanded to RM547.2m (+20%) with wider margins, possibly from the decline in milk powder prices from Jan 2017 to Mar 2017 (by 10-25% based on indicative prices. Source: Global Dairy Trade) alongside favourable products mixes from new offerings. With lesser marketing expenses incurred due to heavy marketing incursion in 4Q16 and with more efficient internal operations, PBT enlarged to RM290.7m (+257%). 1Q17 net profit closed at RM230.4m (+244%).

Not so bad after all? While the market for Nestlé may be showing a quicker than expected recovery, it may not be a signal on the overall consumer sentiment and spending habit as the group could be expanding its customer base as opposed to improving existing ones. However, the successful growth paints true on our expectations that the strong brand name of the group would be able to garner customer confidence. Operationally speaking, while there is uncertainty in the direction of milk commodity prices, we are confident that earnings could still be cushioned by more efficient production methods and improved supply chain.

Maintain MARKET PERFORM with an unchanged TP of RM80.66. While we leave our FY17/FY18 earnings estimates unchanged for now pending further details from the briefing today, our new earnings assumptions could see upside bias. Our TP is based on unchanged 28.0x FY18E EPS, which is in line with +0.5 SD over 5-year mean.

Risks to our call include: (i) weaker-than-expected sales, (ii) unfavourable commodity prices, and (iii) higher-than-expected operating costs.

Source: Kenanga Research - 26 Apr 2017