This article first appeared in The Edge Financial Daily on February 27, 2020
Nestle (Malaysia) Bhd
(Feb 26, RM141.70)
Maintain underperform with a lower target price of RM124.50: Nestle’s financial year ended Dec 31, 2019 (FY19) core net profit (CNP) of RM652 million (arrived at after stripping off one-off chilled dairy business disposal gain of RM21 million) came in within our expectations at 97% but slightly below consensus forecast at 94%. We believe the deviation is largely owed to weaker-than-expected export sales growth. A declared final dividend of RM1.40 which brought full-year dividend to RM2.80 is deemed to be slightly below our forecast of RM2.90, implying a payout ratio of 97.6%.
FY19 reported revenue of RM5.52 billion came in flattish with an observed growth of 2% after adjusting for the divested chilled dairy business. This is attributed to sustained domestic sales growth of 5%, likely backed by the group’s strong sales execution as well as successful product innovations. In spite of this, CNP was flattish at RM652 million (+0.4%) as higher raw material costs were offset by greater cost efficiencies.
For the fourth quarter ended Dec 31, 2019 (4QFY19), its reported revenue came in lower (-1.4%) while the adjusted revenue net of chilled dairy divestment came in flattish, as sustained domestic sales were shadowed by weaker export demand. Nonetheless, CNP of RM130.6 million grew 14%, mainly driven by of lower effective tax rate of 23% versus 4QFY18’s 31%.
Recent global developments have caused a great sense of uncertainty on macroeconomic factors, leading to volatile commodity prices and exchange rates. While this may dampen the group’s profitability moving forward, we believe the group’s resilient domestic sales will continue to be anchored by its established brand presence as one of the market-leaders, as well as new product launches. In the longer-run, its newly completed Milo plant in Chembong is also anticipated to aid in providing better economies of scale and greater production capabilities.
We revised our FY20 estimates (FY20E) CNP downwards by 2.8% to account for more conservative export sales growth while introducing new FY21E. Risks to our call include stronger-than-expected sales, more favourable commodity prices, and lower-than-expected operating costs. — Kenanga Research, Feb 26