Highlights

• We attended Nestlé’s 9M17 briefing and came away feeling neutral on the company’s prospects going forward.

• Market share: Nestlé’s overall market share in Malaysia’s F&B segment has increased slightly to just under 16%, attributable to: 1. Double digit growth in the ready-to-drink (RTD) Nescafe and Milo, (due to the rising number of convenience stores in Malaysia); 2. Maggi Noodles (due to the recently introduced Maggi BIG and Maggi BOWL varieties); and 3. Ice cream segment.

• Price increase not a priority: Despite the marginal price hike for Maggi noodle range since Jul-17, Nestle views raising prices as a last resort. Instead, Nestle will look to grow by increasing sales volume and increasing procurement efficiencies.

• Increasing capacity to accommodate anticipated higher sales volume: Nestle plans to expand its distribution capacity leasing a new National Distribution Center. Upon commencement by 2Q18, the new distribution center will expand its capacity by 25%.

• Procurement efficiencies: Nestle plans to embark on a procurement revamp exercise, to more efficiently utilize space in its facilities and trucks (which would result in 24,000 fewer trips taken per annum to deliver the same amount of products). This will then result in 35% less trucks used, 35% reduction in handling requirements and 30% better space utilization in warehouse space, which will ultimately result in the group saving 21% in distribution costs.

• Outlook: We expect Nestle to continue riding on the improving consumer sentiment domestically. Lower income tax, cash handouts to government servants and pensioners in 2018 amongst other measures in the recent Budget 2018 announcement are expected to spur consumer spending which should benefit Nestle.

Risks

• Prolonged depression in consumer sentiments.

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 an unchanged TP of RM85.18 based on DDM (WACC: 7.8%; TG: 3%).

Source: Hong Leong Investment Bank Research - 24 Nov 2017