Highlights

• Nestlé’s 4Q15 top line grew by 8.1% to RM1.199bn yoy (4Q14: RM1.109bn), despite the tougher domestic operating environment. Domestic sales grew 4.8% yoy whilst export sales grew by 20.0% yoy in 4Q15.

• Market shares across most product segments increased on the back of a successful promotional and brand activation campaign. Yoy Nestle gained 100bps across all segments. Of noteworthy mention is the Milo category which has gained traction in the last 2 quarters, gaining 200bps yoy in market share in the process.

• The price of raw materials, which accounts for approximately 50% of input cost have been favorable to the group. Furthermore, the group has benefited from its continuous efforts to optimize its cost structure, which has resulted in Nestle being able to utilize the net savings in boosting its trade and marketing efforts (Opex +13.5 yoy, +39.6 qoq) to garner market share from its competitors.

• Amongst its brand building initiatives in 2015 has been the optimization of its infant nutrition portfolio. Whilst Nestle is a significant player in infant nutrition, it has lagged behind its competitors in the “GUM” or growing up milk segment, which is targeted to children above the age of 1 year old.

• Nielsen’s study indicates that this market segment is worth RM1bn per annum. The realignment of branding, brand activation and launch of the Lactokid product has seen their GUM segment recording a commendable 36% growth yoy.

• The focus in 2016 will be on further improving its internal cost structures. Furthermore, there are no plans to increase prices throughout the year as management believes that the environment and consumers are still too sensitive to accept price increases. Nestlé will continue to invest on marketing and promotional activities in 2016 to build on their market shares.

Risks

• Relatively elastic demand.
• Prolonged depression in consumer sentiments.
• 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. We increase out TP to RM71.60 as we roll over our DDM valuation forward. (WACC: 7.13%; TG: 3%)

Source: Hong Leong Investment Bank Research - 25 Feb 2016