Period  3Q13/9M13

Actual vs. Expectations  The 9M13 net profit (NP) of RM461.2m is considered inline with expectations although it makes up 84.6% and 84.7% of the street’s FY13E NP of RM545m and ours of RM544m, respectively. 9M contributions are relatively higher than 75% because marketing activities, and thus cost, are traditionally heavily loaded in 4Q.

Dividends   As expected, no dividend was declared for the quarter.

Key Results Highlights  QoQ, NP dropped slightly by 2.6% to RM136m on the back of a marginal dip of 0.5% in revenue. Profit margins were lower QoQ due to the higher prices of milk powder (+10.8% QoQ, +54.1% YoY) and depreciation of Ringgit against USD.

YoY, 3Q13 revenue increased 5.7% despite the continuation of unfavourable export sales. The improvement was mainly attributable to the robust domestic sales, which was mainly driven by its effective consumer marketing activities during the quarter such as Nestle Malaysia Family Day Bonanza. In-line with the sales growth, 3Q13 NP recorded a 7.3% YoY growth supported by: (i) favourable input costs except for milk powder and (ii) management’s effort to mitigate the impact of depreciation of Ringgit by the favourable forward hedging position. Margin contraction was observed in 3Q13 due to higher expenses on marketing activities and the construction of the Sri Muda Factory in Shah Alam.

All-in-all, the investment spent on marketing this year has bore fruits, receiving positive feedback and generating higher product demand from consumers. As a result, 9M13 revenue grew 5.6% despite the slowdown in export sales. Coupled with the stable input cost except for milk powder and internal cost savings initiatives under the group, 9M13 NP grew strongly at 13.6% YoY with 0.9ppt NP margin expansion.

Outlook    We continue to see sales growth opportunities for Nestle driven by its product innovations and marketing investments. Furthermore, we are expecting more capacity to be set up upon the completion of its Shah Alam manufacturing complex which is expected to be completed in 2015.

Change to Forecasts  Maintaining our FY13E-FY14E NP of RM544m-RM589m.

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 to Our Call   Subsidies rationalization and implementation of GST might hamper consumer spending. 

Source:  Kenanga