Nestle’s  9M14  results  were  broadly  in  line,  as  its  earnings  comprised 76.2% and 75.9% of our and consensus estimates respectively. Maintain NEUTRAL and our DCF-based MYR67.00 TP, a 1.5% downside. Revenue ticked  up  by  1.4%  YoY  only,  as  weaker  consumer  sentiment  affected domestic demand. At the same time, net profit slid  down  2.0% YoY  on higher marketing expenses. 

Minor  dip  in  profitability.  Nestle  Malaysia’s  (Nestle)  9M14  revenue grew  at  a  slower  rate  of  1.4%  YoY  to  MYR3.7bn.  Sales  were  slightly affected by subdued consumer sentiment resulting from  the  higher cost of  living  and  further  rationalisation  of  government  subsidies.  However, several  of  Nestle’s  product  categories,  such  as  confectioneries, beverages  and ice cream  recorded encouraging sales. This was due  to its  effective  marketing  and  promotional  activities.  Profitability,  on  other and,  deteriorated  slightly  as  its  9M14  EBITDA  margins  decreased  to 18.5%  (9M13:  18.8%).  Although  the  prices  of  some  of  Nestle’s  raw materials  started  to  ease  in  3Q,  overall  input  costs  were  still  slightly higher  vis-à-vis  the  previous  year.  Similarly,  EBIT  and  PBT  margins 
weakened  by  40bps  and  50bps  respectively  on  higher  operating  costs and increased  interest  expenses. Overall, Nestle’s  9M14 core earnings eased  2%  YoY  to  MYR452.1m  –  well  within  our  expectations.  ItsMYR1.2bn  3Q14  turnover  decreased  by  8.9%,  but  core  earnings  of MYR150.1m were better by 26.7%, vis-à-vis 2Q14

Slight delay on new factory.  We had  highlighted  in our earlier report, Higher Operating Costs Flatten Earnings,  that Nestle is building a new factory  in  Sri Muda,  Shah  Alam to ramp up its manufacturing capacity. However,  the  commencement  of  the  facility’s  operations  has  been postponed to 1H15 from 4Q14.  Nonetheless, we are still positive on the expansion as it will spur Nestle’s future growth.  

Forecasts  and  risks.  With  results  being  largely  in  line,  we  make  no changes  to  our  estimates  at  this  juncture.  Key  risks  include  weaker consumer spending, fluctuating raw material prices and competition. 

Still NEUTRAL. All in, we maintain our NEUTRAL call on the stock, with our  DCF-based TP  unchanged at MYR67.00. Nestle  is currently trading at a 27x forward P/E, which is close to its 3-year average P/E of 29x.

Source: RHB