INVESTMENT HIGHLIGHTS

• 2QFY19 normalised earnings declined by -12.7%yoy to RM142.3m mainly due to higher commodities cost

• Sales remain resilient driven by product innovations, despite the loss of contribution from Chilled Dairy business

• First interim dividend declared of 70.0sen per share

• Maintain NEUTRAL stance with a unchanged TP of RM149.50

1HFY19 earnings met our and consensus expectations. Nestlé’s 2QFY19 normalised earnings declined by -12.7%yoy to RM142.3m. Note that there was a one-off gain of RM19.7m resulting from the divestment of Petaling Jaya factory and Chilled Dairy business recognised during the quarter. Cumulatively, this brings its normalised 1HFY19 earnings to RM381.2m which met our and consensus expectations, accounting for 54.6% and 52.7% of full year earnings forecast respectively.

2QFY19 revenue growth remains resilient. Nestlé’s 2QFY19 revenue growth (+2.0%yoy) was mainly attributable to the growth in domestic sales. After excluding the divestment of Chilled Dairy business on 1st January 2019, 2QFY19 revenue growth was robust at +3.4%yoy. The overall revenue grew mainly due to the higher sales achieved as a result of targeted marketing, promotional activities and product innovations.

However, earnings declined due to higher costs. Despite the growth in revenue, the 2QFY19’s earnings declined due to the: (i) higher commodities cost; (ii) one-off warehouse expenses in preparation to scale up the capacity of MILO plant in Chembong in 2HFY19. Consequently, net profit margin dropped by -1.8ppts to 10.7%.

First interim dividend declared. First interim dividend declared for FY19 of 70.0sen per share (vs FY18: 70.0sen).

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

Target price. Our target price remains unchanged at RM149.50 per share. This 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. This includes establishment of global procurement hubs to centralise procurement activities, more efficient logistic handling and divestment of non-core Chilled Dairy business in order to focus on its Milo operations. Premised on the latter, we expect future contribution from MILO to pace up the earnings growth of Nestlé going forward. Therefore, we expect the group to record stable profit margins despite the volatility in input material and increasing operational costs. Nonetheless, we believe that there is limited upside to the share price as all positivity has been priced in at current valuation. All things considered, we are maintaining our NEUTRAL call on Nestlé.

Source: MIDF Research - 28 Aug 2019