Mixed outlook for Nestle despite strong 3QFY18 earnings

KOTA KINABALU: Nestle (Malaysia) Bhd (Nestle) has garnered mixed outlook projections despite having recorded strong third quarter of financial year 2018 (3QFY18) earnings. For the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), it anticipated subdued 4QFY18 sales growth due to the temporary transition in spending after the end of tax-holiday period in spite of strong earnings in 3QFY18.

As per Nestle’s financial statement, profit for the three months ended September 30, 2018 amounted to RM137.7 million, up 15.7 per cent from the corresponding period of the previous year. Meanwhile, profit for the nine months ended September 30, 2018 totaled RM535.1 million, up 4.7 per cent from a year earlier.

“Nonetheless, over a longerterm horizon, we believe that the earnings growth to remain stable as prices of its products will not be significantly different under the Sales and Service Tax (SST), continuous improvement in its market share and stabilising prices of agricultural commodities such as sugar, palm oil, cocoa and coffee beans,” the research arm said.

As such, MIDF Research maintained its `neutral’ call on Nestlé. The research arm’s target price also remained unchanged at RM133.58 per share.

On the other hand, Affin Hwang Investment Bank Bhd (Affin Hwang) viewed that Nestle’s earnings should continue to remain resilient going forward.

“While prospects continue to look favourable for Nestlé, we believe its share price performance has run ahead of fundamentals and thus maintain our `sell’ call and 12-month discounted cash flow (DCF)-derived target price of RM111.00,” Affin Hwang said.

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), the commissioning of the group’s national distribution centre (NDC) during 3Q18 will enable the group to enjoy better economies of scale in their distribution and logistics management. Kenanga Research noted that further savings may be reaped in the medium-term as a fully optimised operation will allow Nestle to manage the group’s entire domestic supply chain via in-house resources.

“Additionally, the group’s recently announced disposal of its chilled dairy business which is expected to compromise nearterm results,” the research arm said.

“However, this could provide a back paddle for long-term growth from the consolidation of its Milo production capabilities for more integrated efficiencies and capacity expansion.”