INVESTMENT HIGHLIGHTS

• 4QFY16 earnings dropped -30.8% to RM32.7m which met our expectations but lagged consensus

• Revenue grew by +4.2%yoy for 4QFY16 despite the decline in earnings

• The gross profit margin for 4QFY16 contracted marginally

• Drop in 4QFY16’s earnings due to higher operating expenses

• Final dividend declared of RM1.30 per share

• Reaffirm NEUTRAL stance with an unchanged TP of RM82.68

Met our expectations but lagged consensus. Nestlé’s 4QFY16 earnings dropped -30.8%yoy to RM32.7m, whilst full year FY16 earnings increased +7.9%yoy to RM637.1m. The full year FY16 earnings met our expectations, accounting for 99% of our FY16 earnings estimates but lagged consensus expectations at 93% of their full year forecasts.

Commendable revenue growth of +4.2%yoy for 4QFY16. Nestlé’s 4QFY16 revenue grew by +4.2yoy to RM1.25b attributed by the growth in domestic sales and export of +3.5%yoy and +6.4%yoy. For the full year FY16, revenue grew by +4.7% to RM5.06b which was the first time that revenue surpassed the RM5b mark. The increase in revenue was driven by the domestic sales and export growth of +3.3% and +9.6% respectively. The domestic sales grew due to the continuous innovation and renovation initiatives as well as successful marketing and trade promotions whilst the export business demonstrated a good turnaround in comparison to the subdued performance in FY15.

The gross profit margin for 4QFY16 contracted marginally. The gross profit (GP) margin for 4QFY16 contracted marginally by -1.8ppts to 36.6%. The marginal contraction was due to the increases of some of the commodities prices and depreciation in Ringgit while at the same time mitigated by the higher revenue growth as well as increase in internal efficiency. On the other hand, GP margin for the full year FY16 increased slightly by +0.9ppts to 39.4%. This is due to the favourable commodity prices in preceding quarters and increasing operation efficiency in the factories and the overall supply chain.

Drop in 4QFY16’s earnings due to higher operating expenses. The 4QFY16’s earnings dropped -32.7%yoy to RM66.9b mainly attributed to the increase in operating expenses of +10.7%yoy as higher marketing and trade investments were incurred in preparation for the early Chinese New Year celebration in 2017. Despite the drop in earnings for the current quarter, full year FY16 earnings rose by +7.9% to RM637.1m which were mostly contributed by the higher operating margins in the preceding quarters as well as benefiting from the lower effective tax rate which decreased by -1.9ppts to 16.9%.

Final dividend declared of RM1.30 per share. A final dividend of RM1.30 per share was declared. This brings the cumulative dividend to RM2.70 per share with a dividend yield of 3.6%.

Reaffirm NEUTRAL stance with an unchanged TP of RM82.68. We are maintaining our NEUTRAL call on Nestlé with an unchanged target price of RM82.68 per share. Our target price is based on dividend discount model using the assumption that required return on equity of 5.70% and sustainable dividend growth rate of 2.11%.

Source: MIDF Research - 1 Mar 2017