Results

Within expectations – Reported 1HFY14 PAT of RM302m came in within expectations, accounting for 51.6% and 50.8% of ours and streets’ estimates, respectively.

Deviation

None

Dividends

Declared first interim dividend of 60 sen/share (2QFY14: 60 sen/share), representing YTD payout and yield of 46.6% and 0.9%, respectively.

Highlights

Revenue: Nestlé experienced YTD growth of 4.2%, largely coming from encouraging domestic sales as the group’s recent launches in 1QFY14 have brought in higher demand to 2QFY14. However, this growth was partially offset by the unfavourable trend in export sales as Indonesia and Philippines invested in local manufacturing capabilities.

We understand that new manufacturing plants in regional countries do not create competition as the products produced are to cater to their local demands, not exports.

Earnings: PBT declined 7% YTD on the back of higher costs of sales from the increase in commodity prices (milk powder, coffee beans and palm oil) as well as higher marketing and promotional expenses for its “Lebih Nilai, Lebih Kebajikan” campaign (up to Apr), World Cup and Ramadan promotions.

Going forward, Nestlé continued to be cautiously optimistic for the remaining of FY14 as domestic demand is expected to be moderate.

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

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
• Unfavourable commodity prices

Valuation

Our HOLD call on Nestlé and target price of RM67.16 based on DDM remained unchanged.

Source: Hong Leong Investment Bank Research- 13 Aug 2014