Period  2Q13/1H13

Actual vs. Expectations  1H13 net profit (NP) of RM324.7m was in line with expectations, making up 59.5% and 59.8% of the street’s FY13E NP of RM545.6m and our forecast of RM543.3m respectively. The 2H normally incurs higher costs and hence resulting in lower earnings because substantial marketing and promotional expenses are usually skewed towards the 2H.

Dividends  60.0 sen interim dividend per share (DPS) was declared in 2Q13 as expected. (Ex-date: 10/9/2013). Another RM1.60 DPS is expected to be declared in FY13, bringing the total DPS to RM2.20 translating into a dividend yield of 3.3%.

Key Results Highlights  QoQ, revenue and NP were lower by 1.1% and 24.0% respectively. 2Q earnings are typically lower than 1Q due to the timing of higher marketing and promotional activities prior to festive season. Despite a lower tax bracket of 19.5% as compared to 24.1% in 1Q13, NP margin declined 3.5ppt to 11.5% as operating cost to revenue ratio increased from 16.4% in 1Q13 to 21.0% in 2Q13.

 YoY, 2Q13 revenue increased 5.6% despite flattish export volumes. This was mainly due to the robust double digit domestic sales growth of confectionery and liquid drinks, which were mainly driven by its effective marketing and promotional activities prior the Ramadhan season. 2Q13 NP improved 16.4% YoY due to gross profits margin expansion by 2.0ppt to 35.7% on the back of favourable raw material prices except for milk powders.

 Similarly, YoY, 1H13 revenue and NP also improved by 5.5% and 16.5%, respectively. This was mainly attributable to the domestic sales growth, which helped to mitigate the slight contraction in export value due to unfavourable 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 new manufacturing capacities to be set up on its recently acquired land next to its Shah Alam manufacturing complex in the coming years.

Change to Forecasts  Maintaining our FY13E-FY14E NP of RM543mRM589m.

Rating   Maintain MARKET PERFORM

Valuation  We are maintaining our TP of RM72.80 for Nestle, implying a PER valuation of 29x over FY14E EPS of 251 sen.

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

Source: Kenanga