Highlights

• Nestlé’s 1HF15 revenue contracted by 4.8% to RM2.421bn yoy (FY14: RM2.543bn), hampered by low consumer sentiment on the back of the Introduction of GST in April. Despite this, Nestle delivered a commendable PAT for the 1HF15 of RM312m, up 12.9% yoy.

• The price of raw materials, which accounts for approximately 50% of input cost, have been favorable to the group, Skim milk powder which is a key input in Milo and infant nutrition and the like is at a 7 year historical low.

• Amongst the new product lines introduced throughout 2HF15, included their latest offering from the MILO brand, the “Nutri- G”, a new wholegrain malt based chocolate RTD, catered for the health concerned consumer who needs nutrition on the go. Management guided despite the short-term headwinds, market shares across most product segments increased on the back of a successful promotional campaign in 1HF15.

• Management believes that export sales have started to normalize in the past 3 quarters, averaging circa RM232m over the period. The Sri Muda RTD plant is fully operational, which could prove pivotal in creating new opportunities for the group, with an official opening targeted for October. Management shared that capacity is expected to grow 6-8% per annum, over the next 6-7 years.

• Going forward, Nestlé will continue to invest more on marketing and promotional activities in 2HF15 to promote its new product and build on the success of gaining market share across most of its products. Whilst management did indicate that in August there seems to have been some normalization in sales, we are optimistically cautious in our outlook for 2HF15.

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

Valuation

We adopted the latest 2-year adjusted beta which resulted in higher DDM-based target price of RM69.59. We upgrade our call to HOLD in view of the defensive nature of its business and shareholding profile.

Source: Hong Leong Investment Bank Research - 17 Aug 2015