Highlights

• Nestlé’s flattish 1QFY15 revenue growth of 0.39% yoy was hampered by exports, which contracted 13.6%. Domestically, sales growth of 4.1% yoy was driven by innovative new products launches in 4Q14 (Nescafe Blend & Brew) and early 1QFY15 (Mat Kool Butterfly), and to a greater degree, the pre-GST pantry loading by consumers.

• The domestic sales performance was driven by the “Lebih Nilai, Lagi Hebat” campaign, in which the group have invested heavily to take full advantage of the March 2015 “window of opportunity”. Consequently, market shares on all key brands grew. Of noteworthy mention, Milo and infant nutrition brands benefited from this pre-loading effect.

• Export sales continue to decline, however management believe that export contractions have reached a stabilization point. Recall that affiliated companies in Indonesia and Philippines have built their own manufacturing facilities. We gathered that these facilities manufacture mainly Milo and Nescafe.

• As such, management guided there is an opportunity to grow exports with new offerings to their export partners such as new Maggi product lines (Nestle Malaysia have invested in increasing Maggi noodle production capacity) and Nescafe Blend & Brew (exclusively manufactured in Malaysia). The Sri Muda RTD plant should be fully operational by August 2015, which could prove pivotal in creating new opportunities for the group.

• Going forward, Nestlé would continue to invest more on marketing and promotional activities in FY15 to promote its new product launches to consumers. Post-implementation of GST, we believe that there will be a period of adjustment in consumer spending behavior. With export trends yet to recover and dampened consumer sentiment in the domestic market, we foresee challenging times for the group to sustain its sales growth in the coming quarters.

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). Negatives
• Highly competitive market with low barriers of entry.
• Global economic slowdown.
• Unfavourable commodity prices.

Valuation

• Our SELL call and target price of RM62.92 based on DDM remain unchanged.

Source: Hong Leong Investment Bank Research - 23 Apr 2015