Highlights 

Nestlé’s  flattish  9MFY14  revenue  of  1.4%  growth was largely affected  from  the  slowdown  in  exports,  which  contracted 13.1%  yoy.  On  the  domestic side, the geographical segment recorded  continuous  yoy  growth  of  5.8%   in  9MFY14, contributed  by a mix of higher  product prices and volume.

The  domestic  growth  has  proven  the  group’s  effectiveness  in carrying  out  its  numerous  promotional  campaigns  of  which they  have  invested  heavily  on.  Management  also  highlighted that their market shares   have  also grew resulting from  this.

Going  forward,  we  believe  Nestlé  would  continue  to  invest more  on  marketing  and  promotional  activities  to  boost  its volume  given  the  challenging  market  environment.  Moreover, we  foresee  that  consumer  sentiment  will  cont inue  to  be dampened  in FY15 when  GST implementation  kicks in.

Management  mentioned  that  the  implementation  of  GST would  result  in  slightly  higher  ASP  (less  than  6%)  of  its products  despite  having  some  of  its  raw  materials categorized  as  zero-rated.  However,  further  details  on  the matter were not discussed further.

With  regards  to  higher  labour  costs,  Nestlé  plans  to overcome  this  by  increasing  labour  productivity  (efficiency). The  group  aims  to  increase  productivity  by  15-20%,  which would  eventually  outweigh  the increase in labour  costs.

As  for  operatingprofit  margin,  the  more  favourable commodity  prices  (vs.  1HFY14)  and  strengthening  of  MYR against  USD  have  managed  to  narrow  the  margin  gap, bringing  9MFY14’s  margin  to  16.25%  vs.  only  15.87%  in 1HFY14.  Hence,  Nestlé‘s  is  turning  slightly  optimistic  for  its full  year  profit,  which  the  group  believe  would  likely to record slight yoy growth.

This  is  in-line  with  our  forecast  of  approximately  5 -6% bottomline  yoy  growth,  also  in  tandem  with  the  Nestlé‘s model of  achieving  5-6% organic growth  annually.

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  RM66.52  based on DDM remained  unchanged.

Source: Hong Leong Investment Bank Research - 29 Oct 2014