Highlights

• Nestlé’s 9MFY16 top line grew 4.8% to RM3.8bn yoy (9MFY15: RM3.6bn), on the back of improved domestic (+3.3% yoy) and export sales (+11% yoy). Management shared that 60% of the growth can be attributed to innovative new products. Neighbouring Indonesia and the Philippines continue to be key export markets.

• Prices of key commodities (milk, coffee and sugar) have started to normalize after several years of historic lows (see figure #1). Nonetheless, the group is hedged for a large part of FY17. Furthermore, the lower conversion cost/tonne resulting from internal efficiency measures in production will cushion margins in the near term. Increase in ASP is a measure of last resort, so as to not stymie the normalizing consumer sentiments and organic sales growth.

• Amongst the major launches in 3Q16 is Oatmee Maggi. A new variant of Maggi with an oats content of 51%. It is catered towards the health conscious consumer in a localized flavour and form. The product is slated for export to Australia, New Zealand and Singapore next year.

• The gravitation toward on the move consumption by consumers has benefited the RTD segment. Their capacity at Sri Muda has reached a juncture where additional capex will be spent in the filling section to cater for this increased demand. Previous FY16 capex guidance of ~RM100m has been revised to ~RM150m.

• Management touched on the importance of E-commerce as a growing sales channel with their recent collaboration with Lazada and 11street. Despite its infancy, management believes front running this channel at present will benefit the group in the long term as this channel continuously encroaches on the traditional retail space.

• On that note, A&P spending within the traditional adex channels will be sustained, but engagement on the digital frontier will continue to gain momentum.

• Nestle will continue to invest in product segments and A&P channels where there is opportunity for growth; to build a foundation for the future on the back of normalizing sentiments. We expect FY16 results to trump that of FY15.

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

• We revise our forecast to account for better cost efficiencies in production and updated capex assumptions on better guidance from management. FY16/17/18 EPS is revised upwards by 2%/2%/2%.

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

• Our TP is raised slightly to RM81.20 from RM80.12. (WACC: 7.5%; TG: 3%)

Source: Hong Leong Investment Bank Research - 27 Oct 2016