• 2QFY17 revenue grew by +3.8%yoy to RM1.3b

• Gross profit margin contracted

• Earnings dropped by -14.2%yoy to RM162.1m

• Interim dividend declared of RM0.70 per share

• Reaffirm NEUTRAL stance with an unchanged TP of RM82.76

Met our and consensus expectation. Nestlé’s 2QFY17 earnings dropped -14.2%yoy to RM162.1m, whilst the 1HFY17 earnings dropped -4.1%yoy to RM392.5m. Nevertheless, the cumulative earnings still met our and consensus expectations of 58.6% and 61.2% respectively of the full year earnings forecast due to a stronger performance in the previous quarter (1HFY is generally a stronger period).

2QFY17 revenue grew by +3.8%yoy to RM1.3b. Nestlé’s 2QFY17 revenue grew by +3.8%yoy to RM1.3b attributed by the effective marketing as well as trade activities held for the month of Ramadhan and Hari Raya. These helped to deliver the desired growth for the current quarter. In addition, the export business contributed strongly to the revenue growth.

The gross profit margin contracted. The gross profit (GP) margin for 2QFY17 contracted by -6.0ppts to 36.6%. This is mainly due to the higher raw material prices coupled with a weaker Ringgit which had made the input costs more expensive. The prices of major raw materials such as milk powders, coffee beans and palm oil had increased compared to the corresponding quarter,.

Earnings dropped by -14.2%yoy to RM162.1m. The 2QFY17’s earnings dropped by -14.2% to RM162.1m mainly driven by the external headwinds such as the increase in raw material prices and devaluation of Ringgit. Nevertheless, operating expenses dropped - 15.9%yoy due to the operation efficiency initiatives and diligent cost management.

Impact to earnings. No changes pending analyst briefing on Thursday, 24th August 2017.

Interim dividend declared of RM0.70 per share. An interim dividend of RM0.70 per share was declared, to be paid on 21 September 2017.

Reaffirm NEUTRAL stance with an unchanged TP of RM82.76. We are maintaining our NEUTRAL call on Nestlé with an unchanged target price of RM82.76 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 - 22 Aug 2017