INVESTMENT HIGHLIGHTS

• Stable sequential quarterly revenue growth in FY16

• Emphasis on product innovation to sustain growth

• Strong growth from both domestic and export segments

• Higher commodities prices to impact on GP margin

• Managing expenditures to neutralise the rising prices

• Maintain NEUTRAL with a revised TP of RM82.68 per share

Stable sequential quarterly revenue growth in FY16. Revenue growth for Nestlé Malaysia has been quite stable with 1Q16 to 3Q16 recorded a sequential growth of +2.8%, +8.2% and +3.7% respectively. The significant increase of +8.2% in 2Q16 was due to a lower base in 2Q15 pursuant to GST implementation. The stable revenue growth was achieved on the back of i) Product innovation, and ii) Strong growth from both domestic and export segments.

Emphasis on product innovation to sustain growth. Product innovation is one of the key pillars to sustain revenue growth for Nestlé Malaysia. In FY15, approximately RM400m was generated from new product launches which account roughly 10% of the group’s total revenue. We expect that product innovation will continue to fuel revenue growth as management guided that more than 50% of the revenue growth of 9M16 was attributed to new product launches.

Strong growth from both domestic and export segments. The domestic segment has delivered growth due to aggressive advertising and promotional along with new product innovation. As a result, Nestlé Malaysia’s domestic market share rose from 14.5% (FY14) to 15.8% in FY15 (+1.3ppts-yoy). In the meantime, the export segment has continued to perform well since its turnaround in 3Q15. Currently, exports make up 20% of the group’s total revenue. The growth momentum is expected to continue as Malaysia is the halal hub for Nestlé worldwide and it ships out high quality locally produced halal products to over 50 countries worldwide.

Source: MIDF Research - 2 Feb 2017