Period

2Q15/1H15

Actual vs. Expectations

1H15 net profit of RM311.8m is within expectations by matching 51.5% and 52.3% of our in-house and consensus’, forecasts, respectively.

Dividends

First interim dividend of 65.0 sen/share was declared (vs 1H14:60.0 sen/share), which is in line with our expectation. We expect another 185sen/share to be declared in 4Q15.

Key Results Highlights

YoY, 1H15 revenue declined by 4.8% to RM2.4b which we think can be attributed to the softer consumer spending on the back of persistent weak consumer sentiment and implementation of GST in 2Q15. However, operating profit managed to record an increase of 3.5% to RM417.6m despite the lower turnover thanks to higher efficiency as the cost-saving initiatives bore fruits, while also being aided by favourable raw material prices. As a result, net profit registered growth of 3.2% to RM311.8m.

QoQ, 2Q15 revenue slid 10.6% to RM1.1b, probably due to the swing in purchasing pattern by the consumer in response to the GST implementation starting 1st April 2015. Operating profit declined in a greater magnitude of 33.5% to RM166.7m as the Group embarked on more marketing activities during the quarter in order to mitigate the negative impact to the consumer sentiment triggered by the GST implementation which brought net profit 34.1% lower to RM123.9m.

Outlook

We were encouraged by the results as the Group appears prepared for the weaker consumer spending by improving its production efficiency. We also think that divertingthe savings from efficiency gains into marketing campaigns bodes well for the Group in further strengthening its strong market position as well as shortening the transition period for consumers to adapt to the new costing environment.

Moving forward, we expect the sales to pick up in 2H15 with the gradual recovery in sentiment and spending as consumer adapt to post-GST era. We also think that the recovery pace for NESTLE will be faster in view of the non-discretionary nature of its F&B products and also its aggressive marketing investments.

Change to Forecasts

No changes to our earnings forecasts.

Rating

Maintain MARKET PERFORM

Valuation

We upgrade our Target Price to RM76.20 (from RM73.80) after ascribing higher PER of 27x (from 26.1x) to its FY16E EPS, which is in line with +0.5SD over 5-year mean. We think that the higher valuation is justified as we view it as a resilient and defensive play witha strong brand nameand efficiency gains are shielding its earnings growth from domestic headwinds.

Risks

Higher-than-expected operating costs.

Weaker-than-expected consumer sentiments

Source: Kenanga Research - 13 Aug 2015