We came away from NESTLE’s 1Q17 results’ briefing feeling optimistic on the group’s effort to sustain margins against higher input costs. While new products are expected to drive sales, we are cautiously optimistic with top-line growth due to weakness in sentiment. Still, strong branding should maintain the group’s market position. Maintain MARKET PERFORM with a higher TP of RM83.90 (from RM80.66) from better margins assumptions.

Fruition of investments for better cost management. In the latest 1Q17 results, the group recorded a growth in revenue of RM1.3b (+4% YoY) driven by a c.3% growth in export sales and a c.5% domestic growth. This subsequently translated into a stronger net profit of RM220.7m (+4%). While margins appear to be flattish, it should be noted that 1Q17 had undergone a period of higher forex weakness (estimated average USD/MYR rate at RM4.45 vs 1Q16 at RM4.19) together with higher commodities prices as compared to 1Q16. The stable margins could be attributed to the group’s continuous investments in better supply-chain management and procurement management. Future plans towards a centralised distribution centre may further boost efficiency.

Constant innovation to stimulate growth. The group affirms its approach of developing newer and more appealing products as a primary means to drive sales growth going forward. We stand by the group’s strategy as seasonality plays a large part in consumer spending habits and product preferences are constantly evolving based on market trends. In addition, innovating or reinventing older products is necessary to prevent the phasing out of demand against other competitive offerings in the market.

A hint of price increase was looming. Amidst the generally higher commodities prices, the group had exercised a small degree of price increases for selected products. While the group did not express an intention to raise prices on a large scale, we believe the abovementioned improvements in cost savings from better cost management will enable the group to sustain a majority of its prices for the medium term.

Sunshine from now? While the group continues to demonstrate strength from its new products and positive results from their efforts in tackling cost pressures, we are cautiously optimistic on the sustainability of sales growth as consumer sentiment continues to linger at a low base with no signs of recovery. Nonetheless, we are confident that the group’s position as a leading FMCG player will not be jeopardised given their strong branding and customer confidence in their products. Additionally, the group may benefit further with an expanded bottom-line should forex rates and commodities prices achieve more favourable levels sooner than expected.

Post briefing, we increase our FY17E/FY18E earnings assumptions by 3%/4% as we upgrade our earnings estimates from stronger margins expectations arising from the group’s initiatives.

Reiterate MARKET PERFORM with a higher TP of RM83.90 (from RM80.66, previously). This is based on the revised FY18E EPS of 299.7 sen on an unchanged 28.0x PER, in line with the stock’s +0.5 SD over its 5-year mean PER.

Source: Kenanga Research - 27 Apr 2017