This article first appeared in The Edge Financial Daily on August 23, 2017

Nestle (Malaysia) Bhd 
(Aug 22, RM84.50)
Maintain hold with an unchanged target price (TP) of RM77.30: Nestle (Malaysia) Bhd registered its second quarter of financial year 2017 (2QFY17) core net profit (CNP) of RM162.9 million, bringing cumulative net earnings to RM375.9 million (after taking out foreign exchange gain of RM11.1 million and other non-core items of RM5.4 million). This was broadly in line with our and Bloomberg consensus expectations, accounting for 58% and 56% of respective full-year forecasts. The group declared an interim dividend per share of 70 sen, in line with our estimates.

Nestle’s first half of FY17 (1HFY17) revenue increased 4.1% year-on-year (y-o-y) to RM2.7 billion, while CNP improved 1.2% y-o-y to RM375.9 million. The y-o-y growth in sales was mainly underpinned by healthy domestic demand and expanding export sales as a result of effective marketing and trade promotions alongside new product launches (such as Maggi Hot Mealz, Milo ‘Kaw’ and Kit Kat Mini). This, combined with improved internal cost efficiencies and different timing of marketing expenses, led to a y-o-y growth in CNP in 1HFY17. 

On a y-o-y basis, 2QFY17’s turnover improved 3.8% y-o-y but CNP declined 12.4% y-o-y. The improved top line was mostly attributable to effective domestic marketing and trade activities for Hari Raya Aidilfitri festivities as well as better export sales. Nevertheless, CNP was clipped y-o-y on the back of higher raw material input costs (particularly of palm oil, coffee and milk powder). The earnings before interest, taxes, depreciation and amortisation margin declined 1.3% points y-o-y to 19.8% in 2QFY17. 

We make no changes to our earnings estimates and call pending Nestle’s analysts’ briefing later this week. We maintain our “hold” call and discounted cash flow-based TP of RM77.30. While we continue to like the group for its well-known brand name, strong product mix and prudent management, we think the stock is fairly valued for now. Estimated FY17 to FY19 dividend yields of 3.2% to 3.6% should hold its share price steady moving forward. 

Upside risks to our call include better-than-expected export demand and a significant recovery in domestic spending, while downside risks include any significant spikes in raw material costs. — CIMB Research, Aug 21