KEY INVESTMENT HIGHLIGHTS

• 3QFY19 normalised earnings rose by +7.9%yoy to RM153.9m, in-line with ours and consensus expectations

• Both local and export sales declined during the quarter

• However, earnings improved due to better efficiencies

• Second interim dividend declared of 70.0sen per share

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

9MFY19 earnings met our and consensus expectations.

Nestlé’s 3QFY19 normalised earnings improved by +7.9%yoy to RM153.9m. Cumulatively, this brings its normalised 9MFY19 earnings to RM535.1m which met our and consensus expectations, accounting for 77.5% and 76.8% of full year earnings forecast respectively.

Lower revenue registered for 3QFY19. Nestlé’s 3QFY19 revenue declined by -2.2%yoy to RM1.4b mainly attributable to the: (i) exceptionally strong tax holiday period sales in Q3FY18; (ii) divestment of Chilled Dairy business and; (ii) lower export sales caused unfavourable trading conditions in export markets.

However, earnings improved due to better operating efficiencies. Despite the decline in revenue growth, higher commodity prices and unfavourable exchange rates, 3QFY19’s earnings staged an encouraging growth of +7.9%yoy. This is mainly due to the group focus on driving sustainable efficiencies and cost savings. During the quarter-in-review, operating expenses dropped by -12.2%yoy. Coupled with a lower effective tax rate of 22.3% (vs 3QFY18: 26.3%), normalised net profit margin rose by +1.1ppts to 11.0%.

Second interim dividend declared. The company declared second interim dividend for FY19 of 70.0sen per share (vs FY18: 70.0sen). Cumulatively, this brings the total FY19 dividend declared so far to 140.0sen which is of the same quantum as in FY18.

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%.

Source: MIDF Research - 13 Nov 2019