Highlights

The group’s 1QFY14 strong topline domestic growth (+9.2%) was driven by its Milo, Maggi, Nestlé Aiskrim and Kit Kat, apart from its “Lebih Nilai, Lebih Kebajikan” campaign. We believe 2QFY14 would also enjoy (albeit lesser impact) the benefits from the campaign as it will be until mid-April.

Although Nestlé’s exports were impacted by lower demand (from Indonesia and Philippines as they invest in their own manufacturing plants), the group would try entering into new markets to mitigate this. The plants in Indonesia and Philippines are believed to serve its domestic demands, hence we do not see any potential cannibalization.

Despite the strong performance, the group continues to be cautious about FY14’s outlook with plans to produce more innovative and renovated products, further promote nutritional diets, etc.

Given that commodity prices are on an upward trend (especially milk solids, coffee bean and cocoa), Nestlé have raise prices of ready-to-drink (RTD) (9-10%) and Milk products (5-10%) last month. It plans to increase Milo prices by 5-7% in May.

FY14’s A&P spending is expected to continue growing yoy on the back on more investment in marketing and promotional activities. Nestlé have several promotional plans to be launched this year such as World Cup (June) and Family day (Sept) just to name a few.

We do not expect margin compression despite the additional expenses as we believe Nestlé’s would manage to grow its bottomline from tax benefits.

Capex is estimated at circa RM280m for FY14 with the bulk on the construction of its Sri Muda (RTD) plant in Shah Alam. The plant is estimated to completed and commence operations by end-2014.

The remaining will be for expansion plans (incremental capacity) of its Kit Kat and Noodle products as domestic demands continue to grow. We do not foresee major capex going forward post completion of its major expansion plans.

Risks

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

Forecasts

Unchanged.

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

Maintain HOLD and target price of RM67.16 based on DDM valuation.

Source: Hong Leong Investment Bank Research- 21 Apr 2014