INVESTMENT HIGHLIGHTS

• 3QFY17 revenue grew by +4.8%yoy to RM1.323b

• Gross profit margin contracted

• Earnings declined by -25.5%yoy to RM119.7m

• Interim dividend declared of RM0.70 per share

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

Met our and consensus expectations. Nestlé’s 3QFY17 earnings declined by -25.5%yoy to RM119.7m, whilst the 9MFY17 earnings slipped -10.2%yoy to RM512.3m. Nevertheless, the cumulative 9MFY17 earnings still met our and consensus expectations, accounting for 76.5% and 76.0% of the full year earnings forecast respectively.

3QFY17 revenue grew by +4.8%yoy to RM1.323b. Nestlé’s 3QFY17 revenue grew by +4.8%yoy to RM1.323b attributed to the growth of domestic and exports sales of +4.2% and +6.8% respectively. The domestic sales growth was due to the effective marketing and trade activities held by the group on selected product categories. This is evident from the 2017 SEA Game in Kuala Lumpur where MILO had a strong presence. In addition, the continuous focus on innovation has also been a key, with successful product launches such as MILO Nutri-up, MAGGI Hot Mealz, and NESCAFÉ Latte Hazelnut. Whilst strong export performance was due to the good growth registered by the Nestlé affiliated companies especially in the Asean region.

Gross profit margin contracted. The gross profit (GP) margin for 3QFY17 contracted by -4.8ppts to 34.1%. This is mainly due to the high raw material prices coupled with a weaker Ringgit which had made the input costs more expensive. The prices of major raw materials such as sugar, milk powder and coffee beans had increased compared to the corresponding quarter.

Earnings declined by -25.5%yoy to RM119.7m. The 3QFY17’s earnings dropped by -25.5%yoy to RM119.7m mainly driven by the external headwinds such as the increase in raw material prices and devaluation of Ringgit. Nevertheless, operating expenses continued to drop this quarter by -0.4%yoy which helped to cushion the narrowing gross margin. The dropped is as a result of operation efficiency initiatives and diligent cost management.

Impact to earnings. No changes pending analyst briefing.

Interim dividend declared of RM0.70 per share. An interim dividend of RM0.70 per share was declared in respect of FY17 which will be paid on 14 December 2017. The cumulative dividend so far stands at RM1.40 per share.

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 - 8 Nov 2017