Nestle’s FY14 results were slightly below our and consensus estimates, which  we  attribute  to  weaker  exports  and  higher  operating  expenses.Maintain  NEUTRAL  with  our  DCF-based  TP  nudged  up  to  MYR68.60 (7.0%  downside),  valuing  the  stock  at  an  implied  27x  FY15F  P/E.  We also  trim  our  FY15/FY16  earnings  forecasts  accordingly.  Management also declared a final dividend of 175 sen per share.

Slightly  short.  Nestle’s  FY14  revenue  improved  marginally  by  0.4% YoY  to  MYR4.8bn.  Domestic  sales  growth  was  dampened  by  weakconsumer  sentiment,  while  export  sales  remained  lacklustre.  Exports moderated  due  to  lower  demand  from  affiliated  companies  in  the Philippines  and  Indonesia,  which  have  invested  in  their  own  local manufacturing  facilities.  Meanwhile,  EBITDA  decreased  0.8%  YoY  to MYR837.2m,  as  the  overall  margin  fell  to  17.4%  (-20bps  YoY)  due  to slightly higher  opex.  In addition, stronger  USD  also  raised import costs. All in, FY14 core earnings of MYR550.4m were  slightly short of our and consensus  expectations  at  92.8%  and  93.2%  of  full -year  estimates respectively. Compared  to  3Q14,  revenue  and net profit  for the quarter declined  4.2%  and  34.5%  respectively,  as  higher  marketing  expenses were incurred in 4Q14.
  Dividend  declared.  Management  declared  a final dividend  of  175  sen per  share,  bringing  its  full-year  DPS  to  235  sen  per  share.  We  are forecasting for  an annual yield of  3.4-3.7% going forward, based on our assumption of a payout ratio of close to 100%.

Forecasts  and  risks.  In  view  of  the  weaker-than-expected  FY14 numbers,  we  lower  our  FY15/FY16  EPS  forecasts  by  8.6%/8.3% respectively, factoring in slower growth in sales.  We also introduce our FY17 estimates. Key risks to earnings include lower consumer spending, higher raw material costs, and increased competition.  

Maintain  NEUTRAL.  We  tweak  our  TP  higher  to  MYR68.60  (from MYR67.00, WACC: 7.1%, terminal growth: 1%),  as we roll over our DCF valuation.  We  believe  the  stock  is  fairly  valued,  given  that  our  implied FY15F P/E of 27x is near its 3-year historical mean P/E of 26x. Although we  continue  to  like  Nestle  for  its  strong  branding  and  decent  dividend yield, we are turning cautious on the weaker  performance of its export business.  We  expect  the  company  to  continue  focusing  on  its  core market  in  Malaysia  by  introducing  more  innovative  products,  which should  drive its future earnings growth. This should be further supportedby its relatively stable raw material prices and improved efficiency.

Source: RHB