INVESTMENT HIGHLIGHTS

• 1QFY17 revenue grew by +4.4%yoy to RM1.372b

• The gross profit margin for 1QFY17 remains stable despite higher commodities prices

• Earnings for 1QFY17 grew by +4.4%yoy to RM230.4m driven by the operation efficiency initiatives

• Maintain NEUTRAL stance with an unchanged TP of RM81.56

Met our and consensus expectation. Nestlé’s 1QFY17 earnings met our and consensus expectations, accounting for 34.4% and 32.4% of full year earnings forecast respectively. The first quarter is seasonally the strongest quarter for Nestlé with average contribution of 33% in the last five years.

1QFY17 revenue grew by +4.4%yoy to RM1.372b. Nestlé’s 1QFY17 revenue grew by +4.4%yoy to RM1.372b attributed by the growth in both domestic and exports which grew by +4.7% and +3.6% respectively. The domestic sales grew due to the strong marketing and promotional supports as well as the contribution from new products launched in the last two years whilst the export business continue to deliver solid performance after the turnaround in FY16.

The gross profit margin for 1QFY17 remains stable. The gross profit (GP) margin for 1QFY17 expanded marginally by +0.2ppts to 39.7%. This is the highest GP margin for the first quarter in more than five years, despite the current higher price of commodities prices and depreciating Ringgit which proves that the group is benefiting from its internal efficiency initiatives.

Earnings for 1QFY17 grew by +4.4%yoy to RM230.4m. The 1QFY17’s earnings increased by +4.4% to RM230.4m mainly driven by the operation efficiency initiatives and diligent cost management. From the savings, the group was able to continue with strong marketing and trade investments to further strengthen its profit. The net profit (NP) margin remains the same as the corresponding quarter at 16.8%. Nevertheless, the NP margin level achieved is the highest in more than five years.

Impact to earnings. No changes made pending analyst briefing today

Maintain NEUTRAL stance with an unchanged TP of RM81.56. We are maintaining our NEUTRAL call on Nestlé with an unchanged target price of RM81.56 per share. Our target price is based on dividend discount model using the assumption of a required return on equity of 5.70% and sustainable dividend growth rate of 2.11%.

Source: MIDF Research - 26 Apr 2017