Highlights

• We attended Nestle?s FY16 briefing and came away feeling neutral on the company?s prospects going forward.
• Nestl�?s FY16 top line grew 4.7% to RM5.1bn yoy (FY15: RM4.8bn), on the back of improved domestic (+3.3% yoy) and export sales (+9.6% yoy). Management shared that the bulk of export revenue growth can be attributed to innovative new products.
• Nestle?s EBIT margin in 4Q16 declined to 7.2% from 10.7% in 4Q15, due to higher marketing expenses, mainly on the back of the earlier timing of CNY in 2017.
• Raw Materials: Given the current higher prices of key raw materials to sustain in FY17 (namely milk, coffee and sugar, see Figure 1), management does not rule out the possibility of raising selling prices of products in FY17 in order to maintain its profitability.
• FY16 product launches included: (1) Nescafe Barista machine; (2) MAGGI OatMee Mi Goreng Kari Flavour; and (3) Omega Plus Milk with Oats
• Nestle?s e-commerce sales almost tripled to RM10.8m in FY16 (from RM3.5m in FY15), mainly due to low base effect. While we expect Nestle?s e-commerce sales to expand further (arising from its online marketing expenses), we continue to see less-than-inspiring growth in Nestle?s e- commerce sales due to (1) Unconducive environment in the country (Nestle estimates deliveries costs RM8 per delivery currently, resulting it to be an expensive online grocery platform as opposed to its competitors); and (2) The lack of Malaysian consumers shopping online. Nestle reckon just 2% of the population purchase groceries online. Management guided they expect to see RM30m in online sales in FY17.
• Nestle will have to contend with higher raw material costs due to their forex hedge rolling over in FY17 and rising commodity prices. Despite this, we expect the group to continue its efforts on increasing operational efficiencies in factories and supply chain, which will partially offset higher costs.

Risks

• Prolonged depression in consumer sentiments; strong competition especially in the instant coffee segment; potential failure in quality control.

Forecasts

• Maintained, as we believe our forecast parameters have already reflected the rise in raw material costs in FY17.

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 our HOLD call with an unchanged TP of RM81.20 based on DDM (WACC: 7.13%; TG: 3%).

Source: Hong Leong Investment Bank Research - 02 Mar 2017