We came away from its FY14 results briefing feeling slightly more comforted on the earnings outlook of the company. Although the net profit decline in FY14 was viewed lightly by the management, NESTLE is anticipating a challenging FY15 in view of the tough operating environment on the back of soft consumer sentiment which could potentially be worsened by the implementation of GST. The Group is banking on product innovations, higher operating efficiency and a new plant to drive growth in FY15. We downgrade our TP to RM73.80 (from RM76.10) following earnings downward revision, based on unchanged 26.1x FY2015F EPS, implying +1SD 5-year mean. Together with the recent positive share price movement which may have limited potential upside, we downgrade our rating to MARKET PERFORM from OUTPERFORM.

More clarity to the results. To recap, NESTLE recorded FY14 net profit of RM550.4m (-2%) on the back of flattish sales revenue amounting to RM4.8b. Management indicated that the lower net profit was not worrying as the deviation was due to the higher marketing and distribution expenses, which was within the Group’s control and discretion. Moving forward, we expect the aggressive marketing and promotional activities to be sustained in view of the soft consumer sentiments.

Weaker export sales. Export sales declined 11.6% to RM1b in FY14 due to the resource re-allocation to neighbouring affiliates as well as the slowing global demand. However, domestic sales remained robust with 4.1% growth being achieved in spite of the persistent weak consumer sentiment, which slumped to a low of 89 points in 4Q14, according to Nielsen Consumer Confidence Index Survey, while FY14 average was 8.8% lower as compared to FY13 average. Management attributed the revenue growth to a balanced and mixed function of both price increase and volume growth, which was in line with our assumption.

Conservative outlook for FY15. As for the earnings outlook in FY15, the Group expect the export sales to stabilise at current level, which contribution to the Group’s total revenue stood at 20.7% in FY14, down from 23.5% from FY13. Meanwhile, management indicated that further price increase in FY15 might be difficult considering the soft consumer sentiment as well as the implementation of GST; thus the Group is aiming to further improve its efficiency to protect its profit margins while also embarking on aggressive marketing and promotional activities in order to boost demand.

New product, new plant. NESTLE has launched its revolutionary 3-in-1 coffee product, named Nescafe Blend and Brew since the start of the year. The old 3-in-1 coffee will be discontinued and the Group expects the stocks in the market to be phased out in 1 to 2 months. Exporting the new product is on the radar but management would prioritize satisfying the local demand first before allocating production capacity for overseas market. CAPEX for new product has been accounted for and the Group estimates FY15 CAPEX to be lower at RM204m, significantly lower than the RM362m in FY14 as the Sri Muda plant, which commanded big bulk of the CAPEX, will be rolled out early this year. The CAPEX is in line with our estimates.

Lowering earnings forecasts. We made changes to our FY15E earnings by assuming lower export sales and higher marketing and promotional expenses to be in line with management guidance. As a result, FY15E net profit was revised downward by 11.5% to RM605.3m We also take this opportunity to introduce our FY16E, with net profit of RM663.2m representing 9.6% growth.

aDowngrade to MP with lower TP of RM73.80. Correspondingly with the earnings cut, we downgrade our TP to RM73.80 (from RM76.10), based on unchanged 26.1x FY2015F EPS, implying +1SD 5-year mean. Together with the recent upswing in share prices, which has lowered the potential upside, we downgrade our rating to MARKET PERFORM from OUTPERFORM. 

Source: Kenanga