We attended NESTLE 3Q15 analysts’ briefing, which was attended by approximately 30 fund managers and analysts. We came away feeling reassured on its outlook after gleaming more insights on the Group’s strategy to stay resilient despite the challenging market environment. Management revealed that the export sales have recovered due to new product launches and confident that the momentum can be sustained. The commodity market is expected to be relatively more stable in FY16 where the Group does not expect to increase the price of its products. A more regular dividend payment schedule has been introduced to reward shareholders. All in, we reiterate MARKET PERFORM with unchanged Target Price of RM76.20.

Marketing campaigns to aid sentiment recovery. NESTLE recorded net profit growth of 8.6% to RM490.9m on the back of lower revenue (-1.7%) of RM3.6b. We view the results positively after taking into account the weak consumer sentiment throughout the year and GST implementation. Despite 6.6% QoQ sales growth, management is not complacent with the achievement and remains cautious as it is still early to determine whether the consumer sentiment has fully recovered. Moving forward, more marketing campaigns will be launched in conjunction with new product launches as well as the CNY festival in early 1Q16. We laud the Group’s aggressive marketing initiatives to counter the weak consumer sentiment while also further strengthening its strong branding position.

Export driven by new product launches. Export sales rebounded, registering YoY and QoQ growth of 20.6% and 19.0%, respectively, in 3Q15. Instead of forex advantage, the Group attributed the recovery to new product launches, while the key export products are from the Maggi, Nescafe and confectionery segments. Moving forward, new confectionery products, Kit Kat Green Tea, which has received positive response in the local market, will be exported to neighbouring countries, including Thailand, Vietnam, Philippines and Indonesia. Thus, the Group expects the growth momentum to be sustained while foreseeing FY16 to record positive export sales growth.

Price increase unlikely in FY16. Operating margin was able to expand 1.2ppt thanks to the favourable commodity prices which led to lower raw material costs for NESTLE. Management indicated that the two most notable key raw materials that have been most favourable in terms of price movement are milk powder and coffee powder. Moving forward, the Group expects more stable price movement in FY16 and thus discounting the possibility of price increase of its products in view of the sensitive consumer sentiment. Cost savings from the raw material will be reinvested into marketing activities to stimulate the subdued sentiment.

More regular dividend payments. The Group has declared a second interim dividend together with the results announcement, which was surprising to us as it usually pays dividend twice a year in 2Q and 4Q. Management clarified that this is a new dividend payment schedule for NESTLE to reward its shareholders in a more regular basis as compared to previously. Thus, we made no changes to our dividend forecasts.

Reiterate MARKET PERFORM with unchanged Target Price of RM76.20. Our TP is based on 27x FY16E EPS, which is in line with +0.5SD 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 is on the higher end while dividend yield of 3.5%-3.7% is only average.

Source: Kenanga Research - 26 Oct 2015