Nestle  Malaysia  (Nestle)’s  1HFY14  results  were  in  line,  as  earnings reached  51.0%  of  our  forecasts  and  50.7%  of  consensus  estimates. Revenue  grew  by  4.1%  y-o-y  as  demand  remained  fairly  resilient,  butnet  profit  dropped  by  7.0%  y-o-y  due to  unfavourable input  costs  and higher  marketing  expenses.  We  maintain  our  NEUTRAL  call  on  the stock with an unchanged DCF-based FV of MYR67.00. 

Blip  in profitability.  Nestle’s 1HFY14  turnover  improved  4.1%  y-o-y  to MYR2,542.9m, as domestic demand for its products remained  resilient. Increased  marketing  efforts  such  as  the  recently  launched  “Lebih Kebaikan, Lebih Nilai” advertising campaign, coupled with the World Cup and  Ramadan  promotional  activities,  have  fuelled  its  sales,  bringing growth in several product categories  such as  confectionery, ice cream, liquid drinks  and beverages.  Profitability, however,  suffered a  tad  as its EBITDA  margin  narrowed  to  18.0%  (from  19.6%),  dragged  down  by higher  commodity  prices,  particularly  milk  powders,  coffee  beans  and palm  oil.  Similarly,  EBIT  and  PBT  margins  fell  by  150bps  and  160bps respectively,  on  higher  operating  expenses  relating  to  its  rejuvenatedmarketing campaign and increased interest expenses.  All in  all,  Nestle’s 1HFY14  core earnings  stumbled  7.0%  y-o-y to MYR302.0m,  coming in largely  within  expectations.  Vis-a-vis  1QFY14,  the  group’s  2QFY14 turnover  and  core  earnings  of  MYR1,270.2m  and  MYR118.5m respectively decreased by 0.2% and 35.4% respectively.

Dividend  declared.  On  a  side  note,  management  declared  an  interim DPS of 60 sen per share. This translates into YTD payout ratio of 47%. We are forecasting an annual yield of  3.7-4.3%  going forward, based on our assumption of a payout ratio of close to 100%. 

Forecasts and risks. With the results coming in largely in line, we make no changes to our estimates at this juncture. We take the opportunity to introduce  our  FY16F  EPS  estimate  of  294  sen.  Key  risks  include fluctuations in raw material prices and increasing competition.

Maintain  NEUTRAL.  All  in  all,  we  are  maintaining  our  NEUTRAL  call with  our  DCF-based  FV  unchanged  at  MYR67.00.  While  we  like  the stock’s  decent  dividend  returns,  we  see  the  lack  of  re-rating  catalysts over the near term. 

Source: RHB