Results

• Above – Reported 9MFY16 PAT of RM570.2m which is above expectations, accounting for 87% and 83% of our and street’ estimates, respectively.

Deviations

• None.

Dividends

• Declared second interim dividend of 70 sen/share (3QFY15: 65 sen/share) bringing YTD dividends to RM1.40, representing payout and yield of 57.6% and 1.75%, respectively.

Highlights

• YTD: Revenue in 9MFY16 grew 4.8% yoy, aided by higher domestic sales and strong export sales growth. PAT improved by 16.1% yoy on the back of higher turnover, efficiency increases and a lower effective tax rate.

• Qoq: Turnover of RM1.3bn was higher by 2.1% versus the preceding quarter. However, higher promotional and marketing spending and higher input costs in the quarter caused PAT to decline by 14. 9%.

• Product launches in 3Q16: Nestle Bliss Go, Nestum Banana Caramel, Nescafe Tarik RTD and Maggi Oatmee.

• Commodity prices have been on the rise with sugar almost doubling yoy; coffee and cocoa are on a similar rising trend. Nonetheless, we expect EBITDA margins to remain stable at ~20% in the near term, under pinned by productivity and efficiency-driven savings amid organic volume growth. This is evidenced by YTD Opex rising 7.4% yoy yet EBITDA margins expanding by 1.3ppts yoy.

• We can expect Nestle to continue riding on the improving consumer sentiment domestically, whilst the capex program it undertook in recent years has provided the group with a platform to offer differentiated higher value products to the export arena, thus fueling the resurgence in export sales.

• The group will continue with its “Fuel the Growth” strategy by reinvesting the realized productivity across the supply chain into the innovation and renovation of its products portfolio and intensifying its trade and consumer promotions to boost the group’s market share.

Risks

• Prolonged depression in consumer sentiments; strong competition especially in the instant coffee segment; potential failure in quality control; jeopardy of its Halal certification.

Forecasts

• Unchanged pending analyst briefing later today.

Rating

HOLD ↔

• We believe Nestle warrants a HOLD call as it is fully valued at the current price. Investors should have Nestle in their portfolio on the back of its defensive nature and as a proxy to Malaysia’s recovery in consumption growth.

Valuation

• Maintain TP of RM80.12 based on DDM (WACC: 7.13%; TG: 3%).

Source: Hong Leong Investment Bank Research - 26 Oct 2016