Results

Within expectations – Reported 1QFY14 PAT of RM183.5m came in within expectations, accounting for 31.4% and 30.8% of ours and streets’ estimates respectively.

Do note that 1Q is the strongest quarter due to seasonality, where it usually accounts for 31-33% of full year’s earnings.

Deviation

None

Dividends

None. The group declares its dividends semi-annually.

Highlights

Revenue: Nestlé experienced yoy and qoq revenue growth of 3.7% and 11.8% respectively, largely due to the campaign of “Lebih Nilai, Lebih Kebajikan” which was launched in March. The growth was mainly driven domestically where it jumped 9.2% yoy and 15.3% qoq. Exports in 1QFY14 on the other hand continued to suffer yoy (-13%) from lower sales demand from affiliated companies. Qoq export sales on the other hand showed some recovery with growth of 0.3%.

Earnings: PBT declined slightly yoy on the back of the investments in marketing and promotional activities carried for the abovementioned campaign which was incurred much earlier as compared to previous years. PAT however was slightly offset by the lower tax expense of 23.2%. Qoq, the group recorded a significant jump in earnings largely due to the strong domestic sales coupled with favourable input costs and timing of fixed expenses.

Going forward, Nestlé continued to be cautiously optimistic for the remaining of FY14 as emerging markets are still experiencing volatility.

We believe the group would continue with its efforts in promoting healthy and nutritionally balanced diets for consumers and remain active in its R&D activities in producing innovative products in the near future.

Risks

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

Forecasts

We have fine-tuned our numbers post-release of Nestlé’s FY13 annual report and hence FY14-16 EPS were increased slightly by 0.6-0.9%.

Rating

HOLD

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

Upon fine-tuning our numbers, our DDM-derived target price is now RM67.16 (previously RM67.13). Maintain HOLD.

Source: Hong Leong Investment Bank Research - 18 Apr 2014