Period

1Q15/3M15

Actual vs. Expectations

At 31.0% of our full-year estimate and 31.8% of consensus’, 1Q15 net profit of RM187.9m (+2.4% YoY) is broadly within expectation as historically, the first quarters are normally stronger compared to the next three quarters.

Dividends

No dividend was declared, as expected.

Key Results Highlights

YoY, 1Q15 revenue was flattish at RM1.3b as solid domestic sales on the back of the successful “Lebih Nilai, Lebih Hebat” sales promotion was offset by a decline in export sales. Lower prices of palm oil and coffee beans translated into favourable raw material costs which expanded gross margin by 1.8ppt to 39% and gross profit by 5.3% to RM498.4m. Margin expansion would have been greater if not for the stronger USD against MYR. Higher finance costs limited the net profit growth to 2.4% to RM187.9m.

QoQ, revenue surged 15.2% on the back of the successful “Lebih Nilai, Lebih Hebat” sales promotion which was launched in February to mitigate the pre- GST weak consumer sentiment and also further aided by seasonal effect. As a result, net profit jumped 91.1% to RM187.9m, thanks to the favourable raw material prices as well as the recognition timing of marketing expenses.

Outlook

Despite the strong 1Q15 numbers, we remain cautious of the earnings prospect moving forward with the coming 2Q15 results to reflect the true impact of the GST implementation. Although lower raw material prices is in favour of NESTLE, we expect the appreciating USD to limit potential margin expansion from lower raw material costs.

Moving forward, we expect the consumer sentiment post-GST 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 lesser as compared to the other industries in the consumer space due to the non-discretionary nature as well as strong branding of its F&B products.

Change to Forecasts

No changes were made to our forecasts.

Rating

Maintain MARKET PERFORM

We maintain our MARKET PERFORM rating on NESTLE despite total potential return of less than 3% (- 0.9% capital loss, 3.4% dividend yield) as we do not think that the prospect is that negative for a rating downgrade and we like NESTLE as proxy of the consumer sector.

Valuation

We maintained our Target Price of RM73.80, based on unchanged 26.1x FY2016E EPS, which implied +1SD 5-year mean.

Risks to Our Call

Higher-than-expected raw material prices.

Weaker-than-expected consumer sentiment.

Source: Kenanga Research - 21 Apr 2015