We attended NESTLE’s 1Q15 analysts’ briefing attended by more than 40 analysts and fund managers. We came away feeling more reassured of its growth sustainability despite the weak consumer sentiment that bottomed to 5-year low in 4Q15. NESTLE continued to record solid revenue growth, underpinned by innovative product launches as well as successful marketing campaigns. Management is optimistic that the consumer behaviour will normalize in three months’ time which we concur based on its strong branding and aggressive marketing campaigns. However, we maintain our neutral view on NESTLE as we think that its valuation has peaked. Reiterate MARKET PERFORM with unchanged Target Price of RM73.80.

Dissecting 1Q15 numbers. To recap, NESTLE registered flattish YoY revenue growth of 0.4% in 1Q15 while net profit grew 2.4% to RM187.9m. However, management revealed that during the period, domestic sales actually increased by 4.1%, driven by new product launches as well as successful sales promotion. Meanwhile, net profit growth was driven mainly by lower raw material costs, particularly milk powder and coffee beans. The Group also revealed that its market share in overall local F&B market has strengthened to 15% thus far in FY15 as compared to 14.5% in FY14 and 14.3% in FY13. The dominant market share is phenomenal considering its global compatriots’ market shares of less than 5% in their respective markets.

Product innovation key to growth. NESTLE launched several new products since end-2014, which received positive responses from the local consumers. The new products that were launched during the period include Nescafe Blend & Brew, Kit Kat Ruby, and Mat Kool Butterfly. We are positive with the Group’s continuous innovative approach in introducing new products as it is essential to drive demand on the back of weak consumer sentiment in the local market.

‘Lebih Nilai, Lagi Hebat’. Nestle also embarked on the ‘Lebih Nilai, Lagi Hebat’ sales promotion, which started in February aimed at mitigating the pre-GST weak consumer sentiment as consumer sentiment index fell to a 5- year low in 4Q14. The campaign, which provided additional value to consumer by giving extra portion or volume to the regular products instead of giving price discounts, was well received by the local consumers. As for the financial impact, we expect the additional costs from giving out extra volume for free to be offset by the decline in raw material prices.

Optimistic view on GST. The Group observed that some of its products, particularly Milo, baby food and infant formula attracted some pre-GST stocking up during the quarter. Moving forward, the Group is expecting weaker QoQ numbers in 2Q15, as consumers take time to adapt to the new costing environment. However, management expects the normalization in consumer behaviour to happen as early as 3Q15 which we think is likely due to NESTLE’s more non-discretionary product line.

Reiterate MARKET PERFORM with unchanged Target Price of RM73.80. Our TP is based on 26.1x FY2016E EPS, which implied +1SD 5- year mean. We maintain our neutral stance on the company as we like its strong brand name and innovative marketing, which are essential in sustaining growth in view of the subdued local consumer sentiment. However, we think that its valuation has peaked and dividend yield of 3.4% is not attractive enough to whet investors’ appetite.

Source: Kenanga Research - 23 Apr 2015