Results

• Within expectations – Reported 1HFY15 PAT of RM311m came in within expectations, accounting for 51.6% and 52.3% of ours and streets’ estimates, respectively.

Deviation

• None

Dividends

• Declared first interim dividend of 65 sen/share (2QFY14: 60 sen/share), representing YTD payout and yield of 48.8% and 0.9%, respectively.

Highlights

• Revenue: Nestlé experienced YTD revenue decline of 4.8%, largely due to lackluster consumer sentiment and decline in sales domestically in 2Q15 due to the GST implementation. Decline in export sales is also a contributing factor. Qoq, turnover declined by 10.6% as consumers tightened their purse strings since April, resulting in domestic sales decline marginally by 2%.

• Earnings: Despite the decline in revenue, PAT increased marginally by 3.2% YTD on the back of favorable trend in commodity prices as well as the groups continuous cost saving measures in its production area, which lead to the lowering of cost of sales by 10.2% yoy.

• Going forward, Nestlé expects that, due to its leading market position in many brands, the group is well positioned for recovery in sentiment when GST impact is neutralized in the second half of 2015. We also understand that new Sri Muda RTD plant is fully operational and is ready for opportunities in both the domestic and export market.

• We remain cautious in our outlook for 2HF15 due to the current economic headwinds. Despite nascent sign of post- GST recovery, consumer sentiments remain fragile and Nestles margins could be pressured due to potential higher marketing investments in the second half to maintain the groups leading position.

Risks

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

Forecasts

• Unchanged pending 1HF15 briefing on the 14th August 2015.

Rating

HOLD

Positives:

• Strong brand name with market leader status under its leading brands (Milo and Nescafe).
• Sustainable defensive 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 - 13 Aug 2015