Period    1Q13

Actual vs. Expectations     Although 1Q13 net profit (NP) of RM184.4m made up 34% of ours/consensus estimates, we deem the results as being in line with expectations as i) 1Q is seasonally stronger (CNY festivities) and ii) marketing & promotional activities are typically back loaded.

Dividends     No dividend was declared as expected. We estimate a 220 sen NDPS for FY13E, representing a 3.6% yield and a conservative 95% payout ratio of FY13E EPS of 232 sen (which would be slightly lower than last year’s payout ratio).

Key Results Highlights      QoQ, the NP jumped 85.4% buoyed by a 11.6% increase in sales from both its domestic and export markets, as well as, a lower operating cost incurred. The operating cost-to-revenue ratio in 1Q13 was only 16.4% as compared to 25.3% in 4Q12. We believe this was likely due to the seasonal factor, where the group usually spends lower on marketing and promotion activities in the 1Q.

YoY, the 1Q13 revenue and NP increased by 5.4% and 16.7%, respectively due to the robust domestic sales growth in confectionery, liquid drinks, coffee and chilled dairy products. Moreover, Nestle also saw a demand rise in its export markets compared to the marginal decline experienced in 4Q12. The GP and PBT margins meanwhile improved by 3.4ppt and 2.0ppt YoY, respectively due to lower raw material costs and a favourable product mix.

Outlook    We continue to see sales growth opportunities for the company driven by its product innovations and marketing investments. Furthermore, we are expecting more new capacities to be set up in its recently acquired land next to Nestle Shah Alam Manufacturing Complex in the coming years. We do not expect any issue with funding here as Nestle has just returned to a net cash position.

Change to Forecasts     Maintaining our FY13-143E NP of RM544m-RM589m for now as 1Q is seasonally stronger than the rest.

Rating     Maintain OUTPERFORM

Valuation      We are maintaining our TP of RM73.30 on Nestle for now, implying a PER valuation of 29x over FY14 EPS of 251 sen. A lower PER as compared to the previously adopted of 31.6x due to the likelihood of switching higher beta stocks at the expense of defensive stocks like Nestle.

Risks      More challenges ahead due to the still uncertain global economic growth and high volatility in commodity prices.

Source: Kenanga