Nestle (Malaysia) Bhd
(April 24, RM147)
Maintain neutral with a higher target price (TP) of RM149.50: Nestle (Malaysia) Bhd’s first quarter for the financial year 2019 (1QFY19) earnings of RM235.2 million (+1.7% year-on-year [y-o-y]) met our and consensus’ expectations, accounting for 33.7% and 33.5% of full-year earnings forecast respectively. Historically, the first quarter is seasonally the strongest quarter for Nestle with average contribution of 34% in the last five financial years.
Nestle’s 1QFY19 revenue grew by 1.6% y-o-y to RM1.4 billion attributed by the growth in domestic sales (+4.9% y-o-y). The overall revenue grew mainly due to the higher sales achieved from the Chinese New Year celebration. This was the result of targeted marketing, promotional activities and product innovations.
The 1QFY19’s earnings increased moderately by 1.7% y-o-y to RM235.2 million supported by a modest expansion in gross profit margin to 39.2%. Nonetheless, the group recorded a higher effective tax rate of 24.8% which was an increase of 3.2 percentage point y-o-y.
We are maintaining our earnings estimates at this juncture. We are revising our TP of RM149.50 per share, previously RM146.20 per share, as we roll forward our valuation base year to FY20. Our TP is based on dividend discount model with the assumption that required return on equity is of 4.7% and sustainable dividend growth rate of 2.4%.
Moving forward, we expect stable revenue growth in line with; i) healthy private consumption driven by the government initiatives to deal with the rising cost of living; and ii) Nestle’s strong product innovation. In addition, the group has undergone operating efficiency initiatives implementation in FY18. — MIDF Research, April 24