KUALA LUMPUR (April 26): CIMB Research has maintained its "hold" call on Nestle (Malaysia) Bhd, with an unchanged discounted cash flow-based target price (TP) of RM77.30.

"Nestle reported 1Q17 core net profit of RM212.6 million, making up 33% and 31% of our and Bloomberg consensus' full-year estimates," said CIMB in a note released today.

CIMB said Nestle's first quarter ended March 31, 2017 (1QFY17) revenue increased 4.4% year-on-year (y-o-y) to RM1.3 billion while reported net profit also improved 4.4% y-o-y to RM230.4 million.

"The y-o-y improvement in the group's top line was mainly supported by its domestic (+4.7% y-o-y) and export (+3.6% y-o-y) markets," the firm said.

"Stronger sales coupled with effective internal cost efficiencies helped offset the uptick in key raw material prices and led to much stronger core net profit — after stripping out forex gain and other non-core items — growth for the year (+16.6% y-o-y)," it added.

It said the group will also look to expand the production capacities of almost all its product categories this year.

"While several key raw material prices have seen a y-o-y uptick, particularly coffee beans, milk powder and sugar, we think this does not pose a significant risk to the group as it still has room to improve its internal operating efficiencies and automation of production facilities," it added.

Meanwhile, Hong Leong IB Research (HLIB) has also maintained its "hold" call on the group, with an unchanged TP of RM81.20.

"We expect Nestle to continue riding on the improving consumer sentiment domestically. However, rising cost of key commodities may raise input costs going forward as a portion of the group's hedges rolls over," said HLIB.

It said Nestle is expected to maintain its focus on realising efficiency across its operations, which has successful savings of RM129 million, RM134 million and RM188 million in 2013, 2014 and 2015 respectively due to its efficiency.

"We believe Nestle warrants a 'hold' call as it is fully valued at the current price. Investors should have Nestle in their portfolio on the back of its defensive nature and as a proxy to Malaysia's recovery in consumption growth," it added.

HLIB said the risks to its call include prolonged depressed consumer sentiment, strong competition especially in the instant coffee segment, potential failure in quality control and the jeopardy of its halal certification.