Highlights

Nestlé have been committed to provide quality products to Malaysians for more than 100 year ago (since 1912). Today, the group is well-established and well-recognised countrywide (and worldwide) and its brands such as MILO®, NESCAFE®, MAGGI®, NESPRAY® and KIT KAT® have become trusted household names.

The bases of our investment highlights for Nestlé includes:

1. Defensive and steady earnings growth from strong and established brand name with some pricing power;

2. Decent dividend payout with proven track record of >70%;

3. Actively seeking for product enhancements and/or innovations to maintain market share;

4. Capacity expansion from new plant in Shah Alam (RTD line such as Milo and Nescafe); and

5. Widening operating profit margin (albeit marginal) from economies of scale and cost cutting programmes.

Catalysts

• Higher-than-expected projected dividends.
• Incremental growth in export market (wider margins).
• Exceptionally well-received newly innovated products.

Risks

• Relatively elastic demand.
• Poor quality products.
• Poor acceptance on newly innovated products.

Forecasts

We are expecting revenue to grow between 6.0%-8.0% annually in FY14-16, while net profit growth to range between 6.7%-8.5% as profit margin widens on the back of economies of scale and cost cutting programmes (NCE).

Rating

HOLD (NEW)

Positives

• Strong brand name with market leader status under its leading brands (Milo and Nescafe)
• Sustainable earnings with strong dividend payout
• Low maintenance capex requirements

Negatives

• Highly competitive market with low barriers of entry
• Global economic slowdown could jeopardise group’s sales and earnings

Valuation

We arrive at our target price of RM67.13 based on DDM valuation, with WACC of 9.05%.

Given that our target price of RM67.19 does not provide an exciting upside to Nestlé’s current share price, we are initiating coverage on the company with a HOLD call.

Source: Hong Leong Investment Bank Research - 4 Apr 2014