Results

• Above – Reported 1HFY16 PAT of RM409.5 which is above expectations, accounting for 65.9% and 63.7% of ours and streets’ estimates, respectively.

Deviations

• None.

Dividends

• Declared first interim dividend of 70 sen/share (2QFY15: 65 sen/share), representing YTD payout and yield of 40% and 0.88%, respectively.

Highlights

• YTD: For 1HFY16, Nestlé experienced a commendable growth in revenue (5.4% yoy), on the back of higher domestic and double-digit export sales. The strong domestic sales performance was aided by successful marketing campaign coupled with new product launches in their Nescafe, Ice cream, oats and KitKat product range and a lower base due to the GST induced sales vacuum in 1HFY15.

• Margins: YTD operating profit margins expanded by 2.96ppts yoy as the group continues to reap the benefits of its efficiency program across the overall supply chain.

• Earnings: PAT increased to RM490.5m in 1HFY16 (33.3% yoy) on the back of favorable commodity price trend, diligent cost saving as well as a marginally lower tax expense.

• Qoq: Turnover of RM1.24bn declined by 5.8% qoq due to seasonality in the purchasing pattern. PAT declined 14.5% qoq as a result of higher promotional spending on top of the lower turnover.

• Going forward, we remain optimistic for 2HFY16 as we expect Nestlé to lead the consumer recovery due to its leading market position in many brands. We also expect its aggressive marketing and promotional activities coupled with continuous product innovations to continue into 2HFY16.

• We are aware of the recent price movements of sugar and cocoa powder in the futures market. Both commodities are key input materials. We do not expect margin deterioration in the near term as Nestle procures its raw materials 6 months to a year in advance. Nonetheless, we await management guidance on the matter in the coming analyst briefing.

Risks

• Relatively elastic demand.

• Poor quality products.

• Poor acceptance on newly innovated products.

Forecasts

• Unchanged pending analyst briefing on the 29th.

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

We maintain our HOLD call and TP of RM77.80 based on DDM (WACC: 7.13%; TG: 3%).

Source: Hong Leong Investment Bank Research - 23 Aug 2016