Fundamentals of the group remain solid underpinned by i) sustainable growth in domestic product demands, ii) effective strategies to grow online presence and iii) strong brand equity. However, we believe the valuation remain rich at the moment. Hence, maintain Hold.

Domestic Market Pulling its Weight while Exports Drag

Referring to 9MFY19 financials, domestic sales recorded RM3.40bn turnover, representing a robust 4.6% YoY growth (after adjusting the divestment of Chilled Dairy business). The growth was largely underpinned by the group’s targeted promotional efforts, continuous consumer engagement and product innovations. As for exports, it came in weaker as per earlier guidance; recording RM789mn (-8.0% YoY) during 9MFY19. The lower export was due to i) weaker traction of products in foreign markets and ii) intentional refocus towards domestic market while Chembong Plant was undergoing transitory expansion. However, management noted that going forward, dedicated resources would be allocated to grow export channel and shall capture export opportunity quickly

Leveraging on E-Commerce to Drive Growth

Nestle is keen to grow its online presence by i) focusing on premium products, ii) launching and driving awareness for new products and iii) leveraging on ecommerce features/campaigns to drive excitements. With regards to online exclusive campaign, the group has undertaken a series of successful collaboration throughout 2019, though the latest collaboration with Lazada on 11.11 campaign has proven to be a new height, marking a record online sales of RM11.0mn in a single day (more than double the 2018’s 11.11 campaign sales of RM4.4mn). Besides, the team highlighted that e-commerce platform offers a great avenue to test consumers’ response on new innovative products and represents a cost-efficient manner to drive product awareness. E-commerce sales is currently contributing c.4% of the group’s sales. We believe the group’s efforts in engaging consumer online is relevant to modern purchasing behaviour and would lead to immense potential for growth.

Responding to Consumer and Community with Care

Besides innovating new products (new launches in 3QFY19 includes STARBUCKS AT HOME range, NESCAFÉ GOLD Mixes, MILO Protein Up and etc.) to meet consumer demands, we find that Nestle is also quick in responding towards pressing matter of the community. Through rollout of its MILO UHT 125ml drink packs (with paper straws), the group became the first F&B company in Malaysia to introduce paper straws for packaged drinks, avoiding millions of plastic straws hence reduces plastic wastes. Moreover, the group is constantly engaging community to support and train them. For example, it recently collaborated with local authorities to rollout a programme that will boost local coffee farming sector. We believe these timely innovation and engagements are the most effective manner to build brand equity and moat around Nestle.

Relentless Effort to Manage Cost of Input and Exchange Rate

Cost of input and exchange rate remains volatile where the group is relentless in hedging its requirement on a continuous basis to capture windows of opportunity. The group needs a wide basket of raw materials to support its extensive product range in which management noted that some input, specifically grains and packaging are exerting upward price pressure. Overall, we do not expect huge negative surprises given that the group has strategically hedge its commodity and foreign exchange position.

Impact

We make no change to our earnings forecasts.

Valuation

Nestle’s valuation is rich at the moment. Thus, we maintain our Hold call with unchanged target price of RM159.60/share based on DDM valuation (k: 6.0%, g: 3.0%).

Source: TA Research - 14 Nov 2019