We attended Nestlé’s analyst briefing on 18-April and came away feeling more comfortable with the Company’s mid-to-long term growth prospects. Management guided a capex of RM280m in FY14 for the construction of its new Sri Muda plant and to strengthen existing product lines. Although FY14 capex is on the higher-end historically, we believe Nestlé will still maintain its dividend payout ratio of between 95-100%. This is consistent with historical trends, and supported by strong operating cash flow. However, the short-term net profit growth may be limited by higher costs and we do not rule out the possibility that Nestlé may slightly raise its sales price to maintain margins. We expect to see sustained marketing activities throughout the year to tackle the needs of increasingly price-sensitive consumers. We maintain our FY14E earnings at RM631.2m and our FY15E earnings at RM695.4m. Reiterate MARKET PERFORM on NESTLE with Target Price of RM72.80 based on unchanged 27x Fwd. PER valuation.

Capex of RM280m targeted for FY14. During the briefing, management guided a capex of RM280m for FY14 with the bulk allocated for constructing the new Sri Muda plant in Shah Alam. Recall that the Sri Muda plant is adjacent to Nestlé’s existing facility in Shah Alam and is targeted for the production of ready-to-drink (RTD) liquid beverages. We view the move as positive going forward as RTD products such as Smoovlatte have demonstrated robust sales in the Chinese market with bright export potential within the SEA region. The remaining capex is to be used to strengthen existing product lines, especially in the food and confectionary segments.

Dividend payment unlikely to be affected. Against Nestlé’s historical 5 years capex which ranged between RM104m – RM303m, FY14 capex of RM280m is on the higher-end. However, we reckon the company will still maintain its dividend payout ratio between 95%-100% based on the five years historical trend. This is supported by its strong Operating Cash Flow which we expect at RM773m in FY14E, which should cover almost the entire dividend payments estimated at RM603m or RM2.57 per share in FY14E. Effectively, this translates into a decent 3.8% dividend yield.

Revenue to grow but short-term net profit growth could be limited by higher costs. We gather that the recent upward trend in global milk powder, cocoa and coffee prices have increased input cost for Nestlé. Given its leading market position, we do not rule out the possibility that Nestlé may raise its sales price slightly in order to ensure stable margin. We believe that Nestlé is poised to sustain marketing activities throughout the year to tackle the needs of increasingly price-sensitive consumers. This is seen in the ‘Lebih Kebaikan, Lebih Nilai’ campaign in March, which aims to create awareness among Malaysians on the importance of healthy lifestyles, with Nestlé sharing its knowledge and expertise in nutrition, and offering nutritious and tasty products at great value.

Maintain MARKET PERFORM with an unchanged Target Price of RM72.80. Pending the actual price increase (if it materialises), we maintain our FY14E earnings at RM631.2m and our FY15E earnings at RM695.4m. Our valuation of RM72.80 is based on an unchanged Target PER of 27x applied on FY14E EPS of 269.2 sen. The 27x Fwd PER is based on +1.5SD over 5-year historical Forward PER which we believe is justified by Nestlé ’s strong brand portfolio and entrenched domestic market share. Due to the limited upside seen at 6.3%, we maintain our MARKET PERFORM call on NESTLE.

Source: Kenanga