We attended a presentation by the Head of Innovation for NESTLE on global food innovation and trends during the MIFB 2017 Trade Fair. We came away feeling reassured on their constant efforts in product development to cater to the evolving consumer appetite. While challenges remain due to tepid consumer sentiment, we believe NESTLE is strongly positioned to leverage on a recovery from targeting the right avenues. Maintain MARKET PERFORM with an unchanged TP of RM83.90.

The threat of market trends. While poor consumer sentiment may be the direct threat to the spending habits of the generic consumers, the speaker attributed the indirect shift in demand towards the evolving trends and habits which divert consumer away from conventional products. Among which could be the emerging popularity of food trucks and themed cafés, increasing availability of convenience goods and adoption of more health-conscious eating habits.

Boons of e-commerce. Commencing since 2015, NESTLE had explored utilising e-commerce portals, such as Lazada and 11th Street, as a new and effective way to enable convenient access to group products by consumers. Currently with a large following, this allows the group to tap into large multi-brand campaigns to motivate larger purchase volumes from consumers at a lower average price. We believe the benefits further extend to serve as a cheaper marketing platform to introduce new product variants given the high utilisation of these channels.

Better value to consumers with product “premiumisation”. While high prices are known to negatively affect purchase decisions, there may be adverse opinions as premium-priced products justified by better quality could be well received as well. On this approach, premium products for their improved nutritional values and flavours catering to niche tastes could be favoured editions to the group’s product portfolio. New ventures include the first Maggi Oat Noodles and the selling of customisable KitKat chocolates in the recently established Chocolatory.

Adaptability, a strong asset. We feel reassured with the group’s position as the market leader for F&B to be maintained. The group’s strategy to emphasise on product innovation sits well with the current market landscape where demand can be driven by global fads, regulatory changes and shifts in festive seasons, particularly within the country. We believe the introduction of premium products could also better position the group to ride against the constant volatility in commodity prices without resorting to price increases with their higher margin levels. Further, with strong innovation capabilities, the group could cater to more niche customers that have not been tapped by market players. Though possibly on a narrower base from the broader consumer market, capturing a loyal clientele could nonetheless strengthen the relevance of the group’s brand despite a soft economic environment.

Reiterate MARKET PERFORM with an unchanged TP of RM83.90. Our valuation is based on an unchanged PER of 28.0x on FY18E EPS in line with the +0.5 SD over its 5-year mean PER. We maintain our earnings estimates as we had accounted for the group’s growth potential to be suppressed by the prevailing softness in consumer sentiment, which has lingered below “optimistic” levels since Sep 2014. However, we do not discount the possibility for a re-rating from a sooner-than-expected recovery in statistical readings.

Source: Kenanga Research - 11 Aug 2017