INVESTMENT HIGHLIGHTS

• 3QFY18 earnings grew by +15.7%yoy to RM137.7m

• The cumulative 9MFY18 earnings is in-line with our and consensus expectations
• Sales rose +8.3%yoy driven by tax holiday spending
• Despite the higher marketing and tax expense incurred, profit margins remain resilient due to favourable raw material prices

• Maintain NEUTRAL stance with an unchanged target price of RM133.58

Met our and consensus expectations. Nestlé (Malaysia) Berhad’s (Nestlé) 3QFY18 earnings rose by +15.7%yoy to RM137.7m, whilst the 9MFY18 earnings rose by +4.7%yoy to RM535.1m. The cumulative earnings met our and consensus expectations, accounting for 77.1% and 74.5% of full year FY18 earnings forecast respectively.

Sales was mainly boosted by tax holiday spending. Nestlé’s 3QFY18 revenue grew by +8.3%yoy to RM1.4b. This is the highest growth in more than five years. The spike in revenue growth was mainly attributable to the: (i) tax holiday spending where GST was zero-rated from June to August 2018 and; (ii) relocation of its National Distribution Centre (NDC) to AXIS Mega Distribution Centre in Sijangkang from 1st June 2018. Note that the relocation has resulted in in one month delay in sales completion from June 2018 to July 2018.

Favourable raw material prices improved margins. 3QFY18’s net profit margin remains resilient at 9.6%. This was mainly attributable to the lower prices of major raw materials such as sugar and palm oil in comparison to the previous corresponding quarter. Cost savings from these mitigated the higher marketing and promotional expenses and higher tax expense incurred during the quarter.

Interim dividend declared of RM0.70 per share. The second interim dividend of RM0.70 per share was declared in respect of FY18. This brings its cumulative dividend for the year to RM1.40 per share.

Impact to earnings. No change to our earnings estimates pending analysts’ briefing this afternoon.

Target price. We are maintaining our target price remains unchanged at RM133.58 per share. 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%.

Maintain NEUTRAL stance. Despite the strong earnings in the 3QFY18, we anticipate subdued 4QFY18 sales growth due to the temporary transition in spending after the end of tax-holiday period. Nonetheless, over a longer-term horizon, we believe that the earnings growth to remain stable as: i) prices of its products will not be significantly different under the SST; ii) continuous improvement in its market share and; iii) stabilizing prices of agricultural commodities such as sugar, palm oil, cocoa and coffee beans. As such, we are maintaining our NEUTRAL call on Nestlé.

Source: MIDF Research - 31 Oct 2018