Results

• Within expectations –FY15 PAT of RM590.7m came in within expectations, accounting for 97.7% and 98.7% of ours and streets’ estimates, respectively.

Deviations

• None.

Dividends

• Declared second interim dividend of 110 sen/share and a special dividend of 10 sen/share bringing total FY15 dividends to 260 sen/share (FY14: 235 sen/share), representing payout and yield of 103% and 3.5%, respectively.

Highlights

• Revenue: Nestlé experienced a flattish FY15 revenue growth of 0.7% yoy, despite an overall lackluster consumer environment throughout 2015 brought about by the GST implementation in April and a series of administered price hikes.

• Export sales expanded in 2015, with the 4Q15 registering strong double digit growth yoy.

• The structural improvement in gross profits, due mainly to productivity increases at the factories and decline in cost of sales by 4.39% yoy, giving Nestle the leeway to increase its marketing and trade investments in 2015.

• Operating profit: Margins saw a marginal expansion to the degree of 0.6ppt despite higher depreciation charges (+18.8% yoy) due to higher investments made in the preceding year and higher advertising and promotional expenses throughout the year (+32.9% yoy).

• Earnings: Despite the flat revenue growth, PAT increased by 7.3% to RM590.7m yoy on the back of favorable trend in commodity prices, the group’s diligent cost saving across its value chain, and a tax adjustment of RM15.6m (decreasing tax expense by 9.1% yoy).

• Going forward, we expect Nestlé to benefit from the rationalization of consumer sentiment, due to its leading market position in many brands.

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 - 24 Feb 2016