Results

• Within expectations – Reported 9MFY15 PAT of RM490.9m came in within expectations, accounting for 81.2% and 82.9% of ours and streets’ estimates, respectively.

• Historically, Nestlé’s 9M earnings usually accounted for approximately 77-82% of full year earnings and 4Q is usually the weakest quarter.

Dividends

• Declared second interim dividend of 65 sen/share (9MFY15: 130 sen/share), representing YTD payout and yield of 62.1% and 1.8%, respectively. Nestle usually declares dividends in 2Q and 4Q, hence we expect another dividend in 4Q15 to bring payout to >95% for FY15.

Highlights

• Revenue: Nestlé 9M revenue declined marginally by 1.7% yoy dragged by lower 2Q15 sales due to post GST impact. Qoq, turnover increased by 6.6% due to the low base in 2Q15 and the successful corporate campaign of “Lebih Sihat, Lagi Happy”. An Increase in export sales is also a contributing factor.

• Earnings: Despite the slight decline in revenues, PAT increased by 8.6% YTD on the back of favorable trend in commodity prices, the groups continuous cost saving across its value chain, and tax adjustment of RM15.6m (decreasing tax expense by 10.3% yoy).

• Although outlook for the remainder of FY15 remains challenging we expect Nestlé to benefit from normalization of consumer sentiment, due to its leading market position in many brands. We also believe that the new Sri Muda RTD plant will continue to aid in the recovery of export sales.

• Having been 6 months since the implementation of GST, we opine that consumer sentiment whilst remaining fragile is on the mend. Nonetheless, Nestle will continue with its diligent cost management approach and increase their factory capacity to further unlock value. The Stock remains a good long term prospect due to its branding and market position in Malaysia.

Risks

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

Forecasts

• Unchanged pending briefing later today.

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.
• Unfavorable commodity prices.

Valuation

• Our HOLD call on Nestlé and target price of RM69.59 based on DDM remains unchanged.

Source: Hong Leong Investment Bank Research - 23 Oct 2015