Period  4Q13/FY13

Actual vs. Expectations FY13 net profit (NP) of RM561.7m was in line with expectations which came in 2.1% and 3.0% above the street’s FY13E NP of RM550.0m and ours of RM545.1m, respectively.

Dividends  A final single tier dividend of 175 sen was declared for the quarter, bringing the total for FY13 to 235 sen. This payout is 6.7% and 11.9% higher than our estimate and the previous FY12 dividend. This translates into a dividend yield of 3.6%.

Key Results Highlights QoQ, sales declined by 5.8% to RM1,138.3m while the net profit was down by 26.5% to RM100.5m, as expected. The weaker set of results was due to higher investment in marketing and promotion activities that is usually expended in the 4Q.

 YoY, the 4Q13 revenue registered a marginal growth of 3.5%. This was mainly driven by domestic sales, which helped to mitigate the decline in export sales due to softer demand. Net profit only grew by 1.0% YoY mainly due to (i) weakening of the MYR against USD; (ii) higher input cost and (iii) higher effective tax rate (19.3% vs 11.9% in 4Q12).

 YTD, Nestle’s net profit rose by 11.2% YoY backed by a 5.1% growth in sales. Despite a slowdown in export sales, the domestic demand was strong propelled by the marketing and promotion activities which resulted in several product categories such as Confectionery, Liquid Drinks and Food achieving robust double-digit growth. Due to an increase in the sales volume and lower net interest incurred, the FY13 net profit margin showed an improvement of 0.6ppt.

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

Change to Forecasts After some fine-tuning, we are tweaking our FY14E and FY15E NPs higher by 7.1% and 7.3% from RM589.5m-RM636.9m to RM631.2m-RM683.6m, respectively.

Rating Maintain MARKET PERFORM

Valuation  We believe investors have become more demanding in terms of yields since the bond market indicative’s 10- year MGS yield reversed from its low of 3.05% in May-13 to 4.20%. Nestle’s net dividend yield of 3.9% for FY14E may not satisfy growing investor appetite. Hence, we are downgrading the target PER to +1.5SD level of 27x (from +2SD level of 29x).

 The revised FY14 EPS to 269.2 sen is offset by the derating of PER, and our target price is maintained at RM72.80.

Risks  Subsidies rationalization and implementation of GST might hamper consumer spending.

Source: Kenanga