Highlights

• We attended Nestlé’s 1H17 briefing and came away feeling neutral on the company’s prospects going forward.
• Market share: Nestlé managed to raise its overall market share in Malaysia’s F&B segment from 15.2% in 4Q16 to 15.7% in 2Q17. Nestlé attributed this to the increased sales from ready-to-drink (RTD) coffee (despite facing intense competition, in particularly, from Wanda coffee), Maggi Noodles and Milo.
• Impact from higher commodity prices to ease by 2H17: Gross profit margin shrunk from 41.1% in 1H16 to 38.3% in 1H17, due to higher commodity prices in 1H17 (milk powder, sugar). However, we expect gross profit margin to improve in 2H17 as prices of a number of key commodities have started trending down since the end of 2H17 .
• Healthier initiatives: As part of its initiative to offer healthier food products to consumers, Nestlé guided that it has gradually reduced contents of sugar, sodium and saturated fat by 5%, 10% and 10% over time. With consumers increasingly becoming more health conscious, we reckon this bodes well for the future. For example, Maggi Curry is the lowest sodium instant noodle option in the market today.
• Despite the relaxation of the Anti-Profiteering Price Act, Nestle views raising prices as a last resort, as the group reckons it will not be well received amidst current weak consumer sentiment. Instead, Nestlé will look to drive profitability from volume increases or cost efficiencies. Nestle sets an internal target of 5% cost savings in each of its 8 factories.
• Outlook: We foresee better margins going forward from cheaper commodities and the stable currency. Additionally, we believe the group will continue to enhance efficiencies in its factories and supply chain processes which would in turn result in cost savings.

Risks

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

Forecasts

• Maintained.

Rating

HOLD ↔

• We believe Nestle warrants a HOLD call as it is fully valued at the current price despite organic growth prospects going forward. 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 HOLD call with a higher TP of RM85.73 (from RM81.20 previously) based on DDM (WACC: 7.8%; TG: 3%) after rolling forward our DDM valuation.

Source: Hong Leong Investment Bank Research - 25 Aug 2017