Highlights

• Nestlé’s flattish FY14 revenue of 0.4% growth was largely affected by the slowdown in exports, which contracted 11.6% yoy. On the domestic side, the geographical segment recorded continuous yoy growth of 4.1% in FY14, contributed by a mix of higher product prices (50%) and as well as volume growth (50%).

• The domestic growth has proven the group’s effectiveness in carrying out its numerous promotional campaigns which they have invested heavily. 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 in FY15 to promote its new product launches to consumers. Amongst them are the latest “Blend & Brew” 3-in-1 Nescafe that is locally manufactured and is only available in Malaysia.

• We gather that the group launched the above new product just several weeks ago and is target to fully launch across the country within 1-2 months. Thereafter, there could be plans in exporting the Nescafe “Blend & Brew” to its neighboring countries. However, we do not see significant impact to the group’s earnings post-launch of this product as there will be some overlapping with old inventory of instant mix coffee that are currently being priced at a discount.

• As for capex, management is guiding a total capex of RM204m to be incurred in FY15, mainly on its Sri Muda plant.

• Post-implementation of GST, we believe product prices would be raised slightly as we were guided that most of the group’s raw materials are not zero-rated. Hence, we do foresee challenging times for the group to sustain its domestic sales growth for FY15.

Risks

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

Forecasts

• Unchanged.

Rating

SELL 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 SELL call on Nestlé and target price of RM62.92 based on DDM remained unchanged.

Source: Hong Leong Investment Bank Research - 25 Feb 2015