We came away feeling convinced on NESTLE’s growth strategy moving forward after attending its FY15 analysts’ briefing, which was attended by approximately 40 fund managers and analysts. While FY15 growth was mainly driven or aided by the favourable trend of commodity prices, focus in FY16 would be on growing its market share via brand building exercise by utilising the savings from raw material costs and efficiency enhancement. Looking forward, management foresees the commodity market to stay subdued but is not optimistic on a quick recovery in the local consumer sentiment. All in, we reiterate MARKET PERFORM with unchanged Target Price of RM76.20.

Soft commodity prices driving growth. To recap, NESTLE reported net profit of RM590.7m in FY15, a commendable 7.3% growth from FY14. Management attributed the growth to the favourable commodity prices and improvement in operating efficiency, while the launching of new innovative products and the commitment in brand building or marketing activities throughout the year helped shield the top line growth from the weak consumer sentiments. To quantify, management revealed that its market share across the board has expanded by 1ppt in FY16 which we believe was the results of effective marketing programmes on the back of its strong brand name.

Export sales continue recovery. Export sales sustained the rebound momentum in 4Q15 with the sales of RM295m representing a growth of 20% YoY and 12% QoQ. We are positive on the encouraging recovery in export sales, which was driven by the new-product launches and the capacity constraint in some of its neighbouring affiliates. We are optimistic for the export sales to be maintained or further improved and we think that it bodes well for the Group in diversifying the risk away from the local market which is expected to face more uncertainties moving forward.

Eyeing more market share in FY16. Moving forward, management is not expecting big fluctuations in commodity prices and thus forecasting stable production costs. However, the Group is also aiming to continue to reinvest the savings from the production costs in brand building exercises. The initiative is in line with the strategy of gaining market share in the Malaysian market as the Group is not optimistic on a quick local sentiment recovery. Meanwhile, management also played down the likelihood of increasing the prices in June 2016 in conjunction with the expiry of Anti-Profiteering Act in view of the subdued consumer sentiment and to protect its market share.

Reiterate MARKET PERFORM with unchanged Target Price of RM76.20. Post briefing, we maintain our TP at RM76.20, which is based on 27.1x FY16E EPS, in line with +0.5SD 5-year mean. We remained neutral on NESTLE as we favour its defensive nature on the back of a strong brand name supported by brand building initiatives. On the flipside, there is limited upside from our TP while its dividend yield of <4% is unappealing. 

Source: Kenanga Research - 25 Feb 2016