INVESTMENT HIGHLIGHTS

• 1QFY19 earnings grew by +1.7%yoy to RM235.2m, in-line with ours and consensus expectations

• 1QFY19 sales lifted by targeted marketing, promotional activities and product innovations during CNY celebration

• Expect resilient profit margin post operating efficiency initiatives implementation in FY18

• Maintain NEUTRAL stance with adjusted TP of RM149.50

Met our and consensus expectations. Nestlé’s 1QFY19 earnings of RM235.2m (+1.7%yoy) met our and consensus expectations, accounting for 33.7% and 33.5% of full year earnings forecast respectively. Historically, the first quarter is seasonally the strongest quarter for Nestlé with average contribution of 34% in the last five financial years.

1QFY19 revenue driven by CNY celebration. Nestlé’s 1QFY19 revenue grew by +1.6%yoy to RM1.4b attributed by the growth in domestic sales (+4.9%yoy). The overall revenue grew mainly due to the higher sales achieved from the Chinese New Year (CNY) celebration. This was the result of targeted marketing, promotional activities and product innovations.

Modest expansion in GP margin. The 1QFY19’s earnings increased moderately by +1.7%yoy to RM235.2m supported by a modest expansion in gross profit (GP) margin to 39.2%. Nonetheless, the group recorded higher effective tax rate of 24.8% which was an increase of +3.2ppts year-on-year.

Impact to earnings. We are maintaining our earnings estimates at this juncture.

Target price. We are revising our target price of RM149.50 per share (previously RM146.20 per share) as we roll forward our valuation base year to FY20. Our target price is based on dividend discount model with the assumption that required return on equity is of 4.7% and sustainable dividend growth rate of 2.4%.

Maintain NEUTRAL. Moving forward, we expect stable revenue growth in line with: (i) healthy private consumption driven by the government initiatives to deal with the rising cost of living and; (ii) Nestlé‘s strong product innovation. In addition, the group has undergone operating efficiency initiatives implementation in FY18.

Source: MIDF Research - 24 Apr 2019