Nestle (M) Bhd
(Feb 27, RM148.50)
Maintain sell with a target price (TP) of RM109.10: The financial year of 2018 (FY18) core profit after tax (PAT) of RM648.5 million was below our and consensus’ expectations, accounting for just 91.3% and 91.7% respectively. The poorer than expected results were due to weaker than expected revenue growth and higher than the expected effective tax rate.

The company declared a dividend per share of RM1.40 payable on May 7 brought full-year dividend to RM2.80 (4Q17: RM1.35, FY18: RM2.75). Quarter-on-quarter core PAT declined 12.2% to RM120.2 million. The decline in profitability was due to seasonality as 4Q is usually the weakest quarter and inflated 3Q18 sales from sales tax holiday from June to August 2018.

Nestle attributed top line growth of 4.9% to successful product launches in FY18 (Maggi Pedas Giler, Tropicana Lychee Yoghurt Ice Cream, OREO Ice Cream, Milo 3-in-1 Less Sugar, Kit Kat Duo Milk, Nescafe Cold Brew). Despite better gross profit margin of 38.7% (versus 37.1% in FY17), higher effective tax rate (FY18: 24.8% versus FY17: 20.9%) from the expiry of tax incentives resulted in bottom line growth of just 2.1%.

The company will continue to invest in enhancing the brand portfolio and look to increase cost efficiencies. However, we expect Nestle to face headwinds in FY19 from higher commodity prices and more volatile demand in their export markets. Additionally, we expect Nestle’s tax rate to remain at current levels as their tax incentive (linked to halal food production) expired in FY18.  

At current price, Nestle is trading at 47.1 times FY19 P/E and yielding an unattractive 2.1%. In comparison, its holding company in Switzerland trades at 21 times FY19 P/E while its sister company in Nigeria trades at 24.3 times FY19 P/E. We maintain our “sell” call with an unchanged TP of RM109.10, based on an unchanged dividend discount model valuation methodology (r: 6.8%, TG: 3.5%). — Hong Leong Investment Bank Research, Feb 27