INVESTMENT HIGHLIGHTS

• 1QFY18 earnings grew by +0.2%yoy to RM231.2m, in-line with expectation

• Growth in earnings supported by higher sales achieved during the CNY celebration

• Expect stable future earnings momentum

• We are putting our recommendation under review pending analyst briefing

Met our and consensus expectations. Nestlé’s 1QFY18 earnings met our and consensus expectations, accounting for 33.3% and 33.5% of full year earnings forecast respectively. The first quarter is seasonally the strongest quarter for Nestlé with average contribution of 34% in the last five financial years.

1QFY18 revenue driven by CNY celebration. Nestlé’s 1QFY18 revenue grew by +4.2%yoy to RM1.43b attributed by the growth in both domestic and exports which grew by +4.4%yoy and +3.4%yoy respectively. The overall revenue grew mainly due to the higher sales achieved from the Chinese New Year (CNY) celebration as a result of targeted marketing and promotional activities and product innovations.

Earnings for 1QFY18 grew by +0.2%yoy to RM231.2m. The 1QFY18’s earnings increased modestly by +0.2%yoy to RM231.2m mainly despite a commendable growth in revenue, as its gross profit (GP) margin for 1QFY18 contracted marginally by -0.8ppts to 39.1%. Also, a higher effective tax rate of 21.6% which is an increase of +0.9ppts year-on-year.

Prospect. For the FY18, we expect a continual improvement in earnings contributed by the (i) stable top line growth in line with the improvement in consumer sentiment and spending; (ii) the stronger Ringgit will keep cost of input materials at bay; and (iii) optimisation of operating activities. Nevertheless, these will be partially mitigated by; (i) the stronger ringgit which will taper export growth and; (ii) a higher overall effective tax rate of 20%.

Impact to earnings. No changes made to our earnings forecast.

Under Review. Nestlé’s valuation is currently stretched with a forward PER close to 50x in comparison to the average three-year PE of 28x before the inclusion to KLCI and MSCI Malaysia Indices. We believe that the expectation of better earnings prospect in FY18 have been priced into the current valuation. We are putting our call under review pending analyst briefing. Our target price is based on dividend discount model with the assumption that required return on equity is of 5.00% and sustainable dividend growth rate of 2.4%.

Source: MIDF Research - 25 Apr 2018