INVESTMENT HIGHLIGHTS

• Delay in sales recognition due to warehouse relocation

• Positive spill-over effect to be seen in 3QFY18

• Reimplementation of SST in 4Q18 expected to impede the quarterly earnings growth

• Maintain NEUTRAL stance with an unchanged target price of RM132.32

Delay in sales recognition due to warehouse relocation. To recall, Nestlé’s 1HFY18 revenue grew by a modest +3.1%yoy to RM2.7b which is lower than the +4.0% to +5.0%yoy growth for the past three financial years. This was mainly due to the delay in sales completion attributable to the relocation to a new National Distribution Centre (NDC) near Westport. Based on management guidance, we estimated RM21.5m to RM23.7m worth of 2QFY18 sales was delayed and set to be completed and recognised in 3QFY18.

Expect a strong 3QFY18, but a weaker 4QFY18 sales growth. As a consequence of a strong consumer sentiment and pre-SST spending, we expect that sales growth to reach at least +10.0%yoy growth. For the record, 95.0% of Nestlé’s product assortment was charged the standard tax rate of 6.0% under GST. Thereafter, we expect that the sales growth will be subdued due to the temporary transition in spending as a result of the reimplementation of SST. All in, we forecast a 2HFY18 to continue to growth, albeit slower pace.

Operating profit margin will remain stable. We gathered from management that the group has hedged its raw material requirement until the end of the financial year. Hence, we expect that the current gross profit margin of approximately 38.5% to be sustained in 2HFY18. In addition, the impact of the proposed policy by the new government to increase minimal wages on staff costs is expected to be minimal as most of Nestlé’s workforce is being paid higher than the current minimum wages.

Impact to earnings. We are keeping our earnings estimates unchanged at this juncture.

Source: MIDF Research - 16 Aug 2018