Highlights

• We attended Nestlé’s FY17 briefing and came away feeling neutral on the company’s prospects going forward.
• Market share: In 2017, Nestlé’s management guided their overall market share in Malaysia’s F&B segment has increased by 30 basis points, currently commanding approximately 16% of the total market. We understand that ready-to-drink (RTD) and Maggi Mee categories showed the strongest growth in 2017.
• Fuel to grow strategy: Nestle plans to fuel sales by increasing marketing spend in FY18 as it feels consumption will pick up due to various government cash handouts in 2018 and the improved consumer sentiment over the previous two quarters. Due to this, we expect to see increased marketing spend in 1H18 as the group guided they plan to front load its A&P expenses.
• E-commerce: Nestle guided the group saw online sales increase from under 1% of total FY16 revenue to over 2% in FY17. While the group does not see e-commerce as strong avenue for growth currently, Nestle is well positioned to capitalise on e-commerce growth should there be a sudden shift in consumer spending to online platforms. Nestle shared that they enjoy the highest market share online amongst F&B producers with online e-commerce platforms Lazada and 11th Street.
• 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 that are expected to spur consumer spending which should benefit Nestle. Stronger ringgit in 2018 will benefit the group as more than 50% of their commodities are purchased outside of Malaysia.

Risks

• Prolonged weak consumer sentiment.

Forecasts

• We lower our FY18/19 forecasts by 5.2% and 7.8% to account for higher effective tax rate which increased from 17% in FY16 to 20.7% in FY17 and is expected to persist going forward. Note that Nestle enjoyed RM64m in tax credits in FY16.

Rating

HOLD ↔

• With various cash hand outs and stronger ringgit expected to boost top line and margins respectively, Nestle’s prospects look positive. However, with the recent ascendency of the share price, we deem Nestle a HOLD at this juncture.

Valuation

• After Nestle’s entry into the MSCI and KLCI, we lower our discount rate to account for a lower required rate of return due to increased stability (r: 6.8%, TG:3.5% from r: 7.8%, TG: 3% previously). Post discount rate adjustment and rolling over of valuation year, our TP is raised from RM85.18 to RM112.20. Maintain HOLD call.

Source: Hong Leong Investment Bank Research - 23 Feb 2018