This article first appeared in The Edge Financial Daily on November 14, 2019

Nestle (Malaysia) Bhd
(Nov 13, RM145.60)
Maintain sell with a higher target price (TP) of RM108.20: Nestle (Malaysia) Bhd’s (Nestle Malaysia) third quarter of financial year 2019 (3QFY19) results met our expectations. Domestic sales continued to grow through effective marketing and new product launches, but export sales were affected by soft global demand. Nestle Malaysia will continue to focus on its domestic stronghold in the near term while keeping a close eye on operating costs to maintain stable margins. Our earnings estimates are unchanged.

Nestle Malaysia’s 3QFY19 core net profit of RM149 million (+8% year-on-year [y-o-y], +9% quarter-on-quarter [q-o-q]) brought nine months of FY19 (9MFY19) core net profit to RM525 million (-3% y-o-y) reflecting 79%/74% of our/consensus full-year earnings estimates. These were in line with our estimates given that nine-month earnings typically represents about 80% of full-year earnings. Nestle Malaysia also announced an interim dividend of 70 sen per share (3QFY18: 70 sen per share; year to date (YTD): RM1.40 per share).

Revenue fell 2% y-o-y given the higher base in 3QFY18 during the zero-rated goods and services tax (GST) period. This was partially mitigated by domestic sales growth (+1.7% y-o-y) through active product marketing engagements and new product launches and innovations (such as Starbucks at Home range, Milo protein up, Nescafe Gold relaunch) but its export sales remained weak with negative growth y-o-y. That said, 3QFY19 pre-tax profit grew 3% y-o-y on better cost management while core net profit grew by a larger 8% y-o-y from a lower effective tax rate (-4 percentage points y-o-y).

We expect Nestle Malaysia to remain focused on growing its domestic sales while managing its operating costs closely amid a rising commodity environment. At 47.9 times FY20 price-earnings ratio, we believe that Nestle Malaysia’s valuations are not cheap, with modest dividend yield of about 2%.

We roll forward our valuation to FY20 and derive a higher discounted cash flow-based TP of RM108.20 (weighted average cost of capital of 6.3% and long-term growth of 2.5%). — Maybank IB Research, Nov 12