Highlights

• Nestlé’s 3Q15 top line grew by 5.3% to RM1.218bn yoy (3Q14: RM1.157bn), despite the tougher domestic operating environment in 3Q15. Domestic sales grew a modest 1.7% whilst export sales grew by 20.6% in 3Q15.

• Management believes that export sales have started to normalize in the past 4 quarters, averaging circa RM240m over the period.

• Market shares across most product segments increased on the back of a successful promotional and brand activation campaign such as the “Lebih Sihat, Lagi Happy” in 3Q15.

• The price of raw materials, which accounts for approximately 50% of input cost have been favorable to the group. Particularly skim milk powder and coffee (arabica and robusta variants). The only commodity that is on an upt rend is cocoa.

• Nestle has extended their hedge period, longer than usual to take advantage of the low commodity prices. This is also part of their overall strategy to reduce the need to pass on price increases to consumers in FY16 once their hedge rolls over, as they believe consumers are still too sensitive to accept price increases.

• Amongst the new product lines introduced in 3Q15 is Kit Kat Green Tea, a premium Kit Kat variant originally from Japan. Recall that in 2014, Nestle invested to extend their production capacity for their Maggi and Kit Kat lines. Kit Kat Green Tea is slated for export to the Asean market, with Thailand launch happening at present, Vietnam next month and the Philippines and Indonesia slated for early next year.

• Tax expense was lower in 3Q15 due to tax incentives received from their investments made in FY14 and is expected to normalize going forward. However, Nestle is looking at options to reduce their overall tax expense by claiming back against their R&D expenses. Nestlé will continue to invest more on marketing and promotional activities in 4QF15 to build on their market shares and maintain the momentum in anticipation of an earlier CNY in 2016.

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 maintain HOLD call in view of the defensive nature of its business and shareholding profile.

Source: Hong Leong Investment Bank Research - 26 Oct 2015