Nestle's 1QFY14  results were within our and consensus expectations. We deem the results in line as 1Q typically contributes >30% of our fullyear  estimates.  The  good  set  of  numbers  was  supported  by  resilient domestic  sales and stable commodity prices.  Maintain NEUTRAL, with our FV unchanged at MYR67.00.

• Within expectations. Nestle’s 1QFY14 sales improved by 3.7% y-o-y to MYR1,272.7m from MYR1,227.4m, supported by a robust 9.2% growth in  the  domestic  market  amid  continued  investments  in  marketing  and promotional  activities.  The  group  offered  a  range  of  key  products  in economic-value packs during its  “Lebih Kebaikan, Lebih Nilai” campaign last  month,  boosting  sales  of  several  product  categories  eg confectionery,  foods  and  liquid  drinks  to  post  sterling  double-digit revenue growth. However, exports sales were slower, no thanks to lower demand from affiliated companies which have invested in their own local manufacturing facilities.  Nestle’s 1QFY14 net profit dipped marginally by 0.5%  y-o-y,  dragged  down  by  higher  operating  costs  arising  from marketing and promotional expenses  relating  to  its  recent  campaign this quarter.  Vis-à-vis  4QFY13,  the  group’s  1QFY14  turnover  and  earnings expanded  by  11.8%  and  82.7%  respectively,  on  the  back  of  its successful campaign in March coupled with favourable input costs.
• Gross  margin  still  healthy.  Nestle’s  gross  margin  trended  higher  to 37.2%  vs  36.5%  in  1QFY13,  mainly  driven  by  stronger  revenue  and stable  commodity prices, except for  milk powder.  However, its  EBIT and PBT margins both weakened by 1% y-o-y on  higher operating expenses relating to March’s campaign.  
• Expanding capacity.  To ramp up its manufacturing capacity,  Nestle  is building  a  new  Sri  Muda  factory  in  Shah  Alam,  which  is  slated  to commence operation by 4QFY14. We are positive on the expansion as it will help fuel its future growth.
• Maintain  NEUTRAL.  We leave our forecasts unchanged  and keep our DCF-based  FV  at  MYR67.00.  Maintain  NEUTRAL  as  the  stock  is currently  trading  at  a  27x  forward  P/E,  which  is  on  par  with  its  3-year average P/E of 29x.

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Company Profile
Nestle is primarily involved in the manufacturing of beverages, milk, confectionary and cooking aid.

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Source: RHB