Results

Within expectations  –  Reported  9MFY14 PAT of RM452.1m came  in within expectations,  accounted  for  78.0% and  75.9% of ours and streets’ estimates, respectively.

Historically,  Nestlé’s  9M  earnings  usually  accounted  for approximately  77-82%  of  full  year earnings   and 4Q is usually the weakest quarter.

Deviation 

• None

Dividends

• None. Dividends are declared on a semi-annual  basis.

Highlights 

Revenue:  Nestlé  ‘s YTD topline grew marginally by 1.4%  yoy from  the  group’s  effective  marketing  and  promotional activities  despite  dampened  consumer  sentiment  due  to higher  costs  of  living  and  further  rationalization  of  subsidies. Categories  which  have  recorded  solid  business  growth domestically were  confectionary, liquid drinks and ice-cream.

Exports  (~20-21%  of  total revenue)  remained on the declining trend on the back of increasingly challenging global economic environment  as  well  as  softening  in  demand  for  some  export categories,  specifically  to  Indonesia  and  Philippines ,  which have  invested  in their  local manufacturing  plants.

We  do  not  expect  the  declining  export  trend  to  continue  as we  believe  the  group  will  continue  to  explore  new  export markets.  We  also  understand  that  export  trends  are  usually cyclical  and  would recover once its export market gai ns back its momentum.

Earnings:  Despite  slightly  higher  revenue,  bottomline contracted  by  2%  yoy  attributable  to  higher  costs  of investments  under  marketing  and  promotional  activities.  To recap,  Nestlé  have  conducted  several  campaigns  in  9MFY14 such  as  “Lebih  Kebaikan,  Lebih  Nilai”  campaign,  the  World Cup and Ramadan  promotional  activities.

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

Risks

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

Forecasts

• Unchanged,  pending  additional  information  during  analyst briefing  later  today .

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  RM66.52  based on DDM remained  unchanged.

Source: Hong Leong Investment Bank Research - 28 Oct 2014