Analysts mixed on Nestle’s ratings despite it hits record high after posting 4Q results


Nestle (Malaysia) Bhd posted its highest fourth-quarter net profit of RM133.54 million on the back of continued sustainable cost management and different phasing of marketing investments in 2017.

According to The Edge, its net profit for the financial year 2017 (FY17) was RM645.8 million, up 1.36 per cent from RM637.13 million in FY16, while its revenue climbed 3.89 per cent to RM5.26 billion from RM5.06 billion in FY16.

The group also proposed a final dividend of RM1.35.

However, despite the good results, analysts view were mixed on Nestle’s ratings.

Both Affin Hwang Investment Bank Bhd and CIMB Investment Bank Bhd downgraded their ratings on the basis that the valuations are stretched.

Affin Hwang analyst Tan Jun Zhang said Nestle’s share price has rallied by about 40 per cent.

“Trading at 38 times to 2018 earnings per share (EPS) and at a sharp premium to its regional peers, we think that valuation has run ahead of fundamentals. Hence, we downgrade Nestle to ‘sell’ (from ‘hold’),” he told The Edge.

Meanwhile, CIMB analyst Kristine Wong lifted its financial year 2018 (FY18) to FY19 EPS by 0.8 to 0.9 per cent and raised its 12-month discounted cash flow-based target price to RM97.40 as the bank reduced its beta assumption given the lowered risks after the stock’s inclusion to the MSCI Malaysia Index last November.

“While we continue to like its defensive business model, strong brand name and huge consumer base, we think that its valuations are stretched at FY18/FY19F 41 times/38 times, respectively to the price earnings.

“FY18 to FY20 dividend yields are also unappealing at an estimated 2.3 to 2.7 per cent,” she added.

Wong said any significant spike in the cost of raw materials, such as milk powder, sugar and coffee beans, are potential de-rating catalysts while upside risks to CIMB’s call include better-than-expected export demand and a substantial recovery in domestic spending.

However, Kenanga Investment Bank Bhd upgraded its call to “market perform” with a higher target price of RM114.30 from RM81.10 based on a revised price earnings ratio (PER) of 32 times.

“We also roll over our valuation base year to FY19E. With the surge in buying the interest in the stock, dividend yields are less attractive at 2.4 per cent and 2.9 per cent in FY18 and FY19, respectively (from about 3 per cent previously),” said Kenanga analyst Clement Chua.

Chua said going forward, it appears that challenges of higher commodity prices will likely ease as seen in recent results.

“The surge in share prices is likely attributed to the inclusion of the stock into the FBMKLCI Index in December 2017. While valuations appear to be more expensive resulting from this, we believe the short-term sentiment may keep the stock at present levels due to its marketing leading position and resilient presence in the market,” he added.

On the contrary, MIDF Amanah Investment Bhd analyst Nabil Zainoodin maintained a “neutral” rating with a revised target price of RM116.50.

He concurred that its valuation is currently stretched with a forward PER of more than 40 times compared to the average three-year PE of 28 times before the inclusion in both the indexes last year.

“We believe that the improved earnings in the 4QFY17 and expectation of better earnings prospect in FY18 have been priced into the current valuation,” he added.

Nabil expects earnings to improve due to stable top-line growth in line with better consumer sentiment and spending because of government measures to increase household disposable income, stronger ringgit stabilising cost of input materials, and better efficiency.

But these will be mitigated by a stronger ringgit that will taper export growth and a higher effective tax rate of 20 per cent given the increasing deferred tax liabilities.

Furthermore, Hong Leong Investment Bhd analyst Gan Huan Wen said Nestle will benefit from recovering consumer spending in 2018 due to the pre-election cash handouts.

Gan said Nestle has a defensive nature, diversified product portfolio and stellar management.

“Despite this, it must be noted that at current price levels, the dividend yield has slipped over the past five years. We maintain our ‘hold’ call pending an analyst briefing tomorrow with an unchanged target price of RM85.18,” he added.

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