INVESTMENT HIGHLIGHTS

• 4QFY17 earnings grew by +99.5%yoy to RM133.5m mainly due to lower marketing and trade in expenses

• Full year FY17 earnings rose modestly at +1.4%yoy to RM645.8m, in-line with expectations

• Final dividend declared of RM1.35 per share

• Maintain NEUTRAL stance with revised TP of RM116.50

Met our and consensus expectations. Nestlé (Malaysia) Bhd (Nestlé) reported 4QFY17 earnings of RM133.5m which doubled the amount reported in the previous year corresponding quarter. Cumulatively, full year FY17 earnings rose more modestly at +1.4%yoy to RM645.8m. The reported earnings met our and consensus expectations, accounting for 96.4% and 99.4% of the full year earnings forecast respectively.

Earnings rose significantly due to lower operating expenses. 4QFY17 operating expenses dropped -21.7%yoy to RM287.5m due to lower marketing and trading expenses incurred during the quarter in comparison to the corresponding quarter. Recall that the company incurred exceptionally high marketing expenses in 4QFY16 due to the early celebration of Chinese New Year (CNY) in 2017. In contrast, marketing expenses for FY17 were very well spread out over the four quarters and there is no significant reduction in these expenses. Full year FY17 operating expenses dropped at a lower rate of -9.7%yoy which we believe mainly driven by savings and cost optimisation efforts.

Nevertheless, weaker quarterly revenue growth reported. Nestlé’s 4QFY17 revenue grew by a modest +2.5%yoy to RM1,281.7m. This is the weakest quarterly growth reported in two years. The lower growth is attributable to the: (i) lesser sales due to later celebration of CNY in 2018 and; (ii) dropped in export sales of -3.2%yoy. The dropped in export sales is attributable partly due to the late phasing of CNY celebration as well as a lower translation gain as a result of stronger Ringgit.

Final dividend declared of RM1.35 per share. A final dividend of RM1.35 per share was declared. This brings the cumulative dividend in respect of FY17 to RM2.75 per share (FY16: RM2.70 per share) which represents a 100% dividend payout ratio.

Prospect. For FY18, we expect an improvement in earnings contributed by the (i) stable top line growth in line with the improvement in consumer sentiment and spending as a result of government measures to increase household disposable income introduced in Budget 2018; (ii) the stronger Ringgit will stabilise cost of input materials; and (iii) reaping of the benefit of better efficiency. Nevertheless, these will be mitigated by; (i) the stronger ringgit which will taper export growth and; (ii) a higher effective tax rate of 20% given the increasing deferred tax liabilities.

Impact to earnings. We fine-tune our FY18 earnings estimates marginally lower by -2.4%yoy mainly to account for higher effective tax rate. However, we revise upwards FY18 dividend estimates slightly higher to RM2.95 (previously RM2.93).

Maintain NEUTRAL stance with a revised TP of RM116.50. Nestlé’s price has risen approximately +21% since the public announcement of its inclusion into MSCI Malaysia and FBM KLCI Index in November 2017. Nevertheless, valuation is currently stretched with a forward PER of more than 40x in comparison to the average three-year PE of 28x before the inclusion. We believe that the improved earnings in the 4QFY17 and expectation of better earnings prospect in FY18 have been priced into the current valuation. We are maintaining our NEUTRAL call on Nestlé with a revised target price of

RM116.50 per share (previously RM82.76 per share). Our target price is based on dividend discount model with the assumption that required return on equity is of 5.00% (previously 5.70%) and sustainable dividend growth rate of 2.4%. We revised the required rate of return on equity downwards in light of the stock inclusion into MSCI Malaysia and FBM KLCI Index. We are of the view that the inclusion depicts the group’s earnings resilient and hence, lower perceived risk.

Source: MIDF Research - 21 Feb 2018