Review

• Nestle (Malaysia) Berhad’s 9MFY19 financial earnings of RM532.6mn came in within expectation, at 73% and 76% of our and consensus’ full-year forecasts respectively. The group declared a second single-tier interim dividend of 70.0sen/share, similar to last corresponding period bringing YTD DPS to 140.0sen/share.

• 9MFY19 revenue was RM4.19bn, representing a marginal 0.4% YoY growth, or 2.1% YoY growth after factoring in the divestment of Chilled Dairy business. Domestic sales growth remained resilient with sales expanded 4.6% YoY (after accounting for divestment of Chilled Dairy) underpinned by positive offtake towards brand and robust domestic demands during festive season, though partly dragged by export sales.

• 9MFY19 adjusted PBT decreased by 1.6% YoY due to higher input costs, unfavourable exchange rates and expenses incurred for factory expansion in Chembong. 9MFY19 adjusted PBT margin dropped by 0.3%-pts to 16.6%.

• Sequentially, 3QFY19 revenue and adjusted net profit increased by 4.9% QoQ and 13.1% QoQ. The improvement in revenue can be attributed to group’s efforts to drive demands through new products launches (STARBUCKS AT HOME range, NESCAFÉ GOLD Mixes, MILO Protein Up and etc); whilst higher earnings was a follow-through result of higher revenue coupled with group’s thrive for sustainable efficiencies and savings.

Impact

• No change to our earnings forecasts.

Outlook

• Despite rising soft commodity prices and volatile demand in the group’s main export markets, management believes that 4QFY19 is expected to mark a solid result with the group continues proactively enhancing production efficiencies, investing in group’s branding and protecting margins.

• We believe the new line of Starbuck at Home would be a success given that it has garnered positive performance in other recently launched Asian market. Meanwhile, we expect Nestle would continue enhancing its brand portfolio, while also working towards being the world biggest MILO Manufacturing Centre of Excellence.

Valuation

• Maintain Hold with unchanged target price of RM159.60/share based on DDM valuation (g: 3.0%, k: 6.0%).

Source: TA Research - 13 Nov 2019