Period  4Q14/FY14

Actual vs. Expectations  FY14 net profit of RM550.4m (-2%) was below expectations, accounting for 93.2% of the consensus forecast and 87.2% of our in-house estimates. The negative deviations can be attributed to lower-than-expected export sales and higherthan- expected raw material landing costs and A&P expenses.

Dividends  FY14 DPS of RM2.35 (FY13: RM2.35) was below expectation due to the lower profit despite a higher payout ratio of >100%.

Key Results Highlights  YoY, FY14 revenue of RM4.8b was flattish; the robust domestic demand on the back of aggressive marketing and promotional activities was dragged down by lower export sales due to the reallocation of production facilities to neighbouring countries. As a result, net profit declined marginally by 2% to RM550.4m as lower commodities costs were offset by the weaker ringgit and higher marketing and promotional expenses.

 QoQ, 4Q14 revenue of RM1.1b was 4.2% lower probably due to the weaker exports sales on reasons mentioned above. Meanwhile, the recognition timing of marketing expenses took a toll on the net profit, which slumped 34.5% to RM98.3m despite lower effective tax rate of 16.3% vs 20.9%.

Outlook  Despite the weaker results, we still take comfort from the robust domestic demand (5.8% as of 9M14; full year figure to be announced during tomorrow analysts’ briefing), driven by established brand names and aggressive marketing and promotional activities on the back of persistent soft consumer sentiment.

 Moving forward, earnings growth is underpinned by the Sri Muda Ready-To-Drink (RTD) factory in Shah Alam, which is scheduled to commence operations by 1Q15. While the RTD plant could sustain the sales growth momentum domestically, it could also help to counter slowing export sales due to further switching to RTD products on the back of modern lifestyle.

 As for the challenges ahead in regards to the implementation of Goods and Services Tax (GST), we expect minimal impact to the Group as its products are mainly non-discretionary. While a period of adjustment and adaptation is anticipated, we still like NESTLE for its continuous product innovation and strong marketing efforts.

Change to Forecasts  We keep our earnings forecast unchanged pending its results briefing on 24th Feb 2015.

Rating UNDER REVIEW (Previously Outperform. TP:RM76.10)  Share price rose 7.7% since our last report issued on Oct 2014, closing the upside gap from our previous TP of RM76.10, thus warranting a rating downgrade.

 Nonetheless, we keep our rating and TP under review pending more clarification on the outlook by the management in the coming result briefing.

Valuation  Our previous TP of RM76.10 was based on 26.1x FY2015F EPS, representing +1SD 5-year mean.

Risks  Delay in operation commencement of Sri Muda RTD plant.

 Sector risk: Weaker-than-expected consumer sentiment.  

Source: Kenanga