FY17 net profit of RM645.8m (+1.4%) beat our expectation but was within consensus, likely due to lower-than- expected operating expenses. Full-year dividend of 275.0 sen was within estimates. Strong product innovations and lower production costs are expected to keep earnings afloat in the near future. Upgrade to MARKET PERFORM with a higher TP of RM114.30 (from RM81.10) on higher valuations and roll over of EPS base.

FY17 net profit above estimates. FY17 net profit of RM645.8m is above our estimate, but within consensus, making up 107% and 98% of respective full-year forecasts. Positive deviation was due to lower-than- expected operating expenses as a result of better operating efficiencies. A final interim dividend of 135.0 sen was declared for a full- year dividend of 275.0 sen. This is within our FY17 assumptions of 270.0 sen.

YoY, FY17 sales of RM5.3b is better by 4% due to better domestic and export market demand thanks to new product innovations and effective marketing. However, gross profit declined by 3% to RM1.9b due to higher commodity averages against the prior year, leading to a gross margin of 36.7% (-2.7ppt). On the back of better operating efficiencies (i.e. cost management and marketing investments), operating profit registered at RM847.9m (+6%). With higher effective tax seen in FY17 at 20.7% (+3.8ppt), net profit closed at RM645.8m (+1%).

QoQ, 4Q17 revenue of RM1.3b declined by 3% likely due to the lack of seasonality factors. Gross profits increased by 3%, likely due to lower average commodity price. Operating profit grew by 14% due to the phasing of marketing investments during the quarter. 4Q17 net profit registered at RM133.5m (+12%) with higher effective tax of 19.4% (+1.9ppt).

Heavyweight counter. Against poor consumer sentiment, NESTLE’s market leading position has persistently generated growth by tapping on its strong product development capabilities and marketing know- how. Going forward, it appears that challenges of higher commodity prices will likely ease as seen in recent results. The surge in share prices is likely attributed by the inclusion of the stock into the FBMKLCI Index in December 2017. While valuations appear to be more expensive resulting from this, we believe the short-term sentiment may keep the stock at present levels due to its marketing leading position and resilient presence in the market.

Post-results, we raise our FY18E net profit by 5% following more bullish tweaks to the group’s gross profit margin. We also introduce our FY19E numbers.

Upgrade to MARKET PERFORM with a higher TP of RM114.30 (from RM81.10, previously). Our valuation is based on a revised PER of 32.0x as we revisit the group’s 5-year mean PER. We also roll over our valuation base year to FY19E. With the surge in buying interest in the stock, dividend yields are less attractive at 2.4%/2.9% in FY18/FY19 (from +c.3% previously).

Risks to our call include: (i) lower-than-expected sales, (ii) higher- than-expected commodity prices, (iii) higher-than-expected operating expenses.

Source: Kenanga Research - 21 Feb 2018