Period  3Q14/9M14

Actual vs. Expectations 9M14 net profit of RM452.1m (-2%) came in within both our estimate and consensus expectation by accounting for 71.6% of our forecast and 75.9% of streets’.

Dividends  No dividend was declared, as expected.

Key Results Highlights YTD, revenue showed flattish growth of 1.4% to RM3.7b, as consumer sentiment was weak due to the higher living cost environment. As a result, higher operating expenses (3.9%) were incurred to stimulate the market via marketing and promotional activities. Meanwhile, NESTLE also recorded higher finance costs (24.3%) as the Group geared up to fund the CAPEX (estimated at RM320m) mainly for its Sri Muda ready-to-drink (RTD) liquid beverages plant in Shah Alam. That together brought net profit lower by 2% to RM452.1m.

 YoY, revenue retreated by 4.2% mainly attributed to the lower export sales to affiliated companies due to the challenging global economic outlook as well as the new plants in both Philippines and Indonesia, which reduced the demand for Malaysian-made products. Net profit, however, rose 9.9% to RM150.1m thanks to the lower operating expenses (4.5%) as a larger portion of the costs were being recognized earlier in 2Q14, further aided by lower effective tax rate at 20.9% (vs 22.4%).

 QoQ, revenue saw a decline of 8.9% due to the similar reasons mentioned above. However, net profit managed to jump overwhelmingly by 26.7% due to the lower cost of sales (-34%) thanks to the lower raw material prices. Another key driver driving the impressive earnings growth was the recognition timing of the operating expenses between the two quarters, which resulted in a huge swing in operating expenses of RM35.6m.

Outlook  Moving forward, we see the completion of RTD manufacturing complex (targeted end-2014) to drive earnings growth. Meanwhile, the easing of raw material costs would also be a catalyst to the margin expansion moving forward. Therefore, we are forecasting gross margin of 37.8% against the 35.7% the Group managed to achieve so far in 9M14.

 With regards to the imminent implementation of GST in 2Q15, we expect the consumer sentiment to be affected psychologically but to recover gradually as they adapt to the new costing environment. However, we foresee the impact to NESTLE to be minimal or lower in extent due to the nondiscretionary nature as well as strong branding of its F&B products.

Change to Forecasts

 No changes were made to our forecasts.

Rating Maintain OUTPERFORM

 The stock remains as an attractive laggard play. With our unchanged Target Price of RM76.10, it offers11.9% of capital gain upside potential on top of a 3.8% forecasted dividend yield.

Valuation  We continue to peg our TP of RM76.10 with 26.1x FY15E PER, which represents +1 SD over its 5-year mean PER. We like NESTLE for its earnings growth potential, supported by the new plant as well as strong branding and non-discretionary nature of its products. Dividend yield of 3.8% is also deemed decent for the large cap F&B play.

Risks to Our Call Higher input or raw material costs (ie coffee, cocoa, sugar).

 Delay in completion of the new manufacturing plant.

Source: Kenanga