Nestle’s 1Q15 results were in line, as earnings comprised 31.7% and 31.8% of our and consensus estimates respectively. Maintain NEUTRAL, with a DCF-based TP of MYR68.60 (WACC: 7.1%, TG: 1%, 8% downside). We deem the results in line as 1Q typically contributes >30% of our full-year estimates. Although revenue was flattish YoY, net profit improved by 2.4% YoY on the back of a healthy gross margin achieved.
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Within expectations. Nestle Malaysia’s (Nestle) 1Q15 sales improved marginally by 0.4% YoY to MYR1.3bn. Despite subdued consumer sentiment, it still managed to grow sales on the local front, while its exports continued to decline. The solid domestic performance was primarily driven by its “Lebih Kebaikan, Lebih Nilai” campaign launched at the end of Feb 2015, where the group provided consumers with valuefor-money offerings, thereby boosting sales of several key product categories. Its 1Q15 net profit improved 2.4% YoY, thanks to the successful sales campaign and favourable input costs. Compared with 4Q14, revenue and net profit for the quarter expanded by 15.2% and 91.1% respectively from the same reasons above.
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Healthy gross margin. Nestle’s gross margin trended higher to 39.0% vs 37.2% in 1Q14 – mainly driven by favourable commodity prices, except for palm oil and coffee beans. Similarly, EBIT and PBT margins also improved by 50bps and 30bps YoY respectively.
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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 due to the goods and services tax (GST) effect, higher raw material prices and increased competition.
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Maintain NEUTRAL. Although we continue to like Nestle for its strong branding, innovative products and decent dividend yields, we are cautious on the challenging market environment in 2015 due to the GST effect. We also remain wary on the weaker performance of its export business, which has continued to decline since 2H13. Maintain NEUTRAL, with our TP unchanged at MYR68.60. The stock is currently trading at a 29.5x forward P/E, which is close to its 3-year average P/E of 27.4x.
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