Period  1Q14

Actual vs. Expectations 1Q14 revenue of RM1,272.7m is well within expectations, making up 24.4% and 24.7% of consensus and our estimates, respectively.

 1Q14 net profit (NP) of RM183.5m made up 30.8% and 29.4% of consensus estimate of RM595.0m and ours of RM631.2m, respectively. We deem this to be within expectations as first quarter performance tends to be seasonally stronger on festive sales boost.

Dividends  No dividend was announced, as expected.

Key Results Highlights QoQ, sales improved 11.8% while net profit jumped 82.7% driven by positive results from its marketing campaign launched in March, complemented by seasonal effects. EBIT margins improved from 11.3% to 19.1% spurred by lower spending on promotional expenses against the previous quarter.

 YoY, sales registered an improvement of 3.7%. Gross profit (GP) margin improved from 36.5% to 37.2% largely on favorable raw input prices. However, earnings declined 0.5% due to earlier marketing spending than in previous years, which was incurred in the tail end of 1Q14.

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

 However, the possibility of further subsidy rationalization and the implementation of GST may slow consumer spending in the near-term.

Change to Forecasts Maintain our FY14E NP of RM631.2m as 1Q tends to be seasonally stronger. We may fine tune our forecasts pending further updates from management in the upcoming analysts’ briefing.

Rating Maintain MARKET PERFORM

 We are neutral on the near-term outlook despite decent first quarter performance since consumers may become increasingly price-sensitive as the year progresses due to increasing living costs.

Valuation  Maintain target price of RM72.80 with an unchanged Target PER of 27x based on +1.5SD over 5-years historical Forward PER

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

Source: Kenanga