NESTLE (M) BHD

Target price: RM83.90

NESTLE (M) Bhd’s first half of 2017 (1H17) net profit of RM392.5mil accounted for 58% of Kenanga Research’s estimates and 59% of consensus’, falling broadly within expectations. The research firm expects a weaker 2H17 due to slower post-seasonality demand.

The interim dividend of 70 sen is also within Kenanga Research’s expectations.

The 1H17 sales of RM2.7bil grew by 4% year-on-year (y-o-y) due to better performance in the domestic and export markets. This is driven by commendable reception of new products in both markets.

However, 2Q17 revenue of RM1.3bil recorded a 6% quarter-on-quarter (q-o-q) decline attributable to the softer demand during the fasting season.

This is different to 1Q17 where consumer expenditure was more vibrant with the Chinese New Year season. Net profit for 2Q17 was RM162.1mil with a 30% q-o-q decline and higher effective taxes of 23.7%.

The research house said gross profit saw a 3% y-o-y decline and 14% q-o-q fall, likely due to higher unfavourable foreign exchange (forex) exposures towards imported commodities.

Effective cost management strategies adopted by the group since late financial year 2016 (FY16) supported profit before tax (PBT) to register flattish growth at RM503.3mil, which yielded a less than 1% y-o-y rise.

Despite presumably weaker consumer sentiment, Nestle Malaysia continues to demonstrate growth prospects thanks to new product innovations to stimulate market appetite.

While the average forex trend could further challenge profitability in the short term, the group’s earlier investment to improve its cost management controls could keep margins sustainable.

Thus, Kenanga Research maintains its call of “market perform” with an unchanged target price of RM83.90.

The valuation is based on an unchanged price-to-earnings ratio (PER) of 28.0 times FY18 estimates earnings per share.