1H18 net profit of RM397.4m (+1%) and interim dividend of 70.0 sen declared was within expectations. We anticipate a more favourable and stable outlook for the group in the near-term thanks to even forex rates and commodity trends. 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 RM132.55.

1H18 within. 1H18 net profit of RM397.4m is within expectations. This made up 55% of our/consensus full-year estimates, despite 1H17 accounting for c.60% of its full-year’s contributions. Recall that 2H17 operated with unfavourable commodity prices, which affect earnings during that period. We expect commodity outlook to be comparatively more stable in 2H18. An interim dividend of 70.0 sen was declared during the quarter. This is within our full-year estimates of 290.0 sen due to lumpy payments during the 2H period.

YoY, 1H18 revenue of RM2.74b grew by 3% thanks to better domestic and export sales. These were driven by favourable reception of new products and effective marketing to encourage strong demand. Gross profit similarly grew by 3% as commodity prices remained stable. Net profits of RM397.4m, however, only improved by 1% (amidst stable taxes) as operating costs were aggravated by the migration to the newly operational National Distribution Centre (NDC) during 2Q18.

QoQ, 2Q18 sales declined by 8% owing to slower demand during the fasting season and stronger 1Q18 demand from Chinese New Year festivities. Gross profit fell by 11%, where we believe gross margin could have been impacted by poorer product mix in conjunction with the weaker spending. Net profit tanked by 28% mainly owing to the abovementioned migration expense.

Banking on its strong footing. NESTLE’s top-line continued to show unwavering growth, backed by its leading position in the market and strong product and marketing capabilities. Whilst the previous financial year had been affected by unfavourable fluctuations in input costs, we believe the near-term outlook could be more stable, looking at the currency and commodity trends. Further expansion could also be seen from better operating efficiencies paved by the NDC.

Maintain UNDERPERFORM with an unchanged TP of RM132.55. Our valuation is based on a 37.0x FY19E PER (at +1.0SD over 3-year mean PER, applied across large cap F&B stocks). Post-results, we leave our valuations unchanged for now, pending updates from management in 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 - 15 Aug 2018