We came away from NESTLE’s 3Q16 analysts’ briefing feeling reassured of its ability to continue churning growth despite facing the end of soft commodity market tailwind. Management is counting on volume growth and efficiency gain to support earnings growth in FY17 while products price increase will only be the last resort. We made no changes to our earnings forecasts. We reiterate our MARKET PERFORM rating on NESTLE with unchanged Target Price of RM82.10.

Solid volume growth. To recap, NESTLE recorded 9M16 revenue growth of 4.8% to RM3.8b with domestic sales registering healthy growth of 3.3% and export sales growing 11.0% recovering from the weakness in FY15. As no price increase was implemented in FY16, the sales growth was solely driven by organic volume growth on the back of innovative product launches and effective marketing initiatives. The Group expects the same factors to support sales growth moving forward and as such we are making no changes to our earnings forecast.

Efficiency driving margin expansion. During the briefing, we were introduced to one of NESTLE’s latest Maggi product, the Oat Mee Maggi, targeted at the health conscious consumers due to its high nutrition content. Modern distribution channel (E-Commerce) and advertising media (digital media) were lined up to complement the new product which showcased the Group’s efforts and sensitivity in tracking and catering to consumer behaviour. We take comfort from the initiative as NESTLE will be able to expand a foothold into the burgeoning market and thus creating more avenues for growth sustainability.

Price increase the last resort. The normalizing or recovering commodity market trend might pose challenges to the Group. Having benefitted from low commodities costs in FY16, a high base effect had been created for FY17 to match. However, management is aiming to drive FY17 growth via the sustainability of volume growth and continuous efficiency improvement. While the Group refused to rule out the possibility of any price increase in FY17, it will be the last resort. We are positive on the Group’s approach as we think that the innovative product launches and effective marketing strategy may be the better options to sustain growth in view of the persistent weak consumer sentiment.

Reiterate MARKET PERFORM with unchanged Target Price of RM82.10. Post briefing, we maintain our TP at RM82.10, which is based on 27.1x FY17E EPS, in line with +0.5SD 5-year mean. We think that the valuation is justifiable by its market leading position and established brand name in the F&B market. However, we are cautious on its moderating growth prospect particularly after considering the impressive achievement in FY16 acting as a high base and the end of the favourable run in commodities prices.

Source: Kenanga Research - 27 Oct 2016