Highlights

The group’s 1HFY14 strong topline domestic growth (+9.1%) was driven by its ready-to-drink (RTD) products, as well as products from ice-cream and confectionary segment. The encouraging volumes mainly resulted from the group’s aggressive marketing and promotional activities which they have invested heavily.

Amongst the new products launched in 2QFY14 were MAGGI BIG Ayam, MAGGI Royale, Nescafe Latte Caramel and Nestle Dolce Gusto Marrakech Tea. We notice these products have shown promising sales and believe it would likely to flow through into 2HFY14.

On the other hand, exports continued to be impacted by lower volume from its sister companies arising from the latters’ investments in local manufacturing plants. However, Nestlé do not expect the trend to continue as it continues to be on the lookout for other export markets.

1HFY14’s margins were compromised from rising commodity prices but the group expects the recent increase in product prices to offset the higher costs of raw materials. Nestlé raised 9-10% for RTD products in March and 5-10% on milk products in May.

Management guided that the group will be spending much more in capex than guided in the last briefing of RM280m, with expectation of reaching RM320-330m.

The increase is due to additional spending arising from the water crisis in Selangor and several costs overruns in its ongoing developments. Nestlé have also brought forward part of FY15’s capex into FY14.

Capex in FY14 will reach a peak and would slow down in FY15 onwards. Do note that the group incurs heavy capex every 4-5 years, with previous peak in FY09 at total capex of RM257m.

Risks

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

Forecasts

We tweaked our capex assumption higher. Hence, FY14-16 EPS is slightly lowered by 0.9-1.5%.

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

Post-earnings adjustments, our target price is reduced by 1% to RM66.52. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 14 Aug 2014