1Q18 net profit of RM231.2m (+<1%) is broadly within our/consensus expectations, dragged by different festive dates which affect marketing cost recognised. No dividend was declared as expected. We make no changes for now pending further details from today’s briefing. The presently stretched valuations suggest that growth catalyst may have already been priced in. Maintain UP and TP of RM114.30.

1Q18 broadly within. 1Q18 net profit of RM231.2m is broadly within expectations. Although it made up 32% of our/consensus full-year estimates, we expected a c.36% contribution from the first quarter due to seasonal strength. We believe the deviation was due to untimely recognition of expenses (i.e. sales and marketing). No dividend was declared, as expected. The group typically does not pay dividends in the first reporting quarter.

YoY, 3M18 revenue of RM1.4b increased by 4% thanks to better sales from both domestic and export demands. The higher sales could be attributed by effective marketing strategies and product innovation, particularly during the seasonally strong Chinese New Year quarter. Gross profit, however, only grew by 2% as margin was dampened by slightly higher raw material costs. Group PBT further experienced thinner growth at a flattish 1% following higher marketing spend incurred during the quarter. Recall that 1Q17 saw a lower A&P spend due to an earlier CNY period. Adding to higher effective taxation rate of 21.6% (+0.9ppt), net profit only improved slightly to RM231.2m (from RM230.4 in 1Q17).

QoQ, 1Q18 sales grew by 12% likely due to the Chinese New Year festive season during the quarter. Gross profits expanded to RM559.3m (+21%) with stronger margins, possibly due to better forex rates affecting imported raw material prices. Furthermore, the phasing of marketing investments which were higher in 4Q17 translated to a higher PBT of RM294.8m (+80%). Slightly affected by higher effective tax rate, net earnings registered a 73% growth.

Still fundamentally solid? NESTLE has continued to expand its top- line and stayed in the leading position. The group’s strength is supported by its product development capabilities and wide marketing reach. With regards its operating landscape, we believe NESTLE could be set for a reprieve as low commodity prices followed by lower forex rates would translate to margins expansion. We believe the group would be a net beneficiary of a stronger Ringgit as only c.20% of its sales is accounted to exports.

Maintain UNDERPERFORM with an unchanged TP of RM114.30. Our valuation is based on a 32.0x FY19E PER, which is currently in- line with its 5-year mean. Post-results, we leave our valuations unchanged for now, pending updates from management during today’s results briefing. We believe most positives have already been priced in following its stretched valuations post-inclusion into a key market index. In addition, its dividend yields are less attractive at present price levels, generating 2.0%/2.4% in FY18/FY19.

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

Source: Kenanga Research - 25 Apr 2018