We attended Nestle’s company briefing yesterday, and the turnout was encouraging as usual. We came out feeling comforted given that: (i) domestic sales remain strong driven by continuous efforts in marketing activities and creative innovation despite a slowdown in export, (ii) input costs remain stable except for milk powder, and (iii) the management’s efforts to continue expanding production capacity. We found the meeting informative as the management shared more industrial knowledge on the coffee segment and convinced us that that the outlook will remain promising as one of the key earnings contributors to the group. Meanwhile, we have pushed RM50m capex from FY13 to FY14 as guided by the management. Hence, minor changes in fixed assets causing our NP edging slightly higher by 0.1%-0.2% for FY13EFY14E from RM544.3m-RM588.6m to RM545.1m-RM589.5m, respectively. However, this has immaterial impact on our TP which is unchanged at RM72.80 based on 29x PER over FY14E EPS of 251 sen. Given a total return of 9%, we are maintaining MARKET PERFORM on Nestle.

Domestic sales strong, bolstered by confectionery and beverage. To recap, 9M13 earnings recorded 13.6% YoY growth on the back of 5.6% increase in revenue, which the domestic sales grew 8.6% YoY to cushion the decline in export sales (-3.0% YoY), which was attributable to the encouraging performance of confectionery and beverage segments. The weakening export sales were due to: (i) the slowdown in regional markets such as ASEAN, Middle East and Europe, (ii) the setting up of local manufacturing arms in Indonesia (for cereal product range) and Philippine (for non-dairy creamer product range), and (iii) one-off logistic issue during the month of September causing delay in sales. Given the uncertainty in export trades, Nestle reemphasizes its continuous efforts in marketing activities and product innovations to sustain domestic sales. The management also shared during the briefing that they’ve recently launched a new product named MAGGI 2-Minn Big Curry in August.

Nescafe – one of the strongest pillars. Although Nescafe has strong market share with more than 70% of the total retail coffee, the consumption of coffee in Malaysia is still considered at the lower-end of 120 cups per capita as compared to Sweden of 780 cups per capita or even Indonesia of 150 cups per capita. Survey also showed that it contributed only 9% to the overall beverage market, hinting more room for growth. YTD, the volume growth of Nescafe outperformed the overall coffee market. To keep up the good work, the company will continue to improve recipe, revamp the product’s name or even give it a facelift in order to grow the segment further and maintain it as one of the key contributors to the group.

Sri Muda Factory in Shah Alam is on schedule… We continue to see vast growth opportunities driven by its product innovation, marketing investments, and capacity expansion. We have mentioned earlier that the latest expansions will eventually be doubling the production capacity of its RTD products such as Milo, Nescafe, Nestle Omega, Nestle Low Fat Milk and Nestle Full Cream to meet with rising demand. Including the construction of the new plant, the management guided a capex of RM250m for FY13E earlier. However, due to timing issue, a total amount of RM50m will be pushed to FY14E. Hence, we estimate that net gearing for FY13E will be reduced slightly from 0.38x to 0.32x while the latter will remain pretty flat at 0.34x. Despite that, the construction of the new plant is still on schedule to start commencing in the mid of 2014. Due to the minor changes of the fixed assets resulted from the capex adjustment, our NP edged slightly higher by 0.1%-0.2% for FY13E-FY14E from RM544.3m-RM588.6m to RM545.1m-RM589.5m.

Source: Kenanga