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This article first appeared in The Edge Financial Daily, on October 27, 2015.

 

Nestle_table_FD_27Oct15_theedgemarketsNestle (M) Bhd
(Oct 26, RM72)
Maintain market perform with an unchanged target price (TP) of RM76.20:
We attended Nestle (M) Bhd’s third quarter ended Sept 30, 2015 (3QFY15) analysts’ briefing, which was attended by approximately 30 fund managers and analysts. We came away feeling reassured about its outlook after gleaning more insight into the group’s strategy to stay resilient despite the challenging market environment.

The management revealed that export sales had recovered due to new product launches, and is confident that the momentum can be sustained. The commodity market is expected to be relatively more stable in FY16, when the group does not expect to increase the prices of its products. A more regular dividend payment schedule has been introduced to reward shareholders. All in, we reiterate our “market perform” call on Nestle, with an unchanged TP.

Nestle recorded a net profit growth of 8.6% to RM490.9 million, on the back of lower revenue (-1.7%) of RM3.6 billion. We view the results positively after taking into account the weak consumer sentiment throughout the year, and the implementation of the goods and services tax. Despite a 6.6% quarter-on-quarter (q-o-q) sales growth, the management is not complacent about the achievement and remains cautious as it is still early to determine whether consumer sentiment has fully recovered.

Moving forward, more marketing campaigns will be launched in conjunction with new product launches, as well as the Chinese New Year festival in early 1QFY16. We laud the group’s aggressive marketing initiatives to counter the weak consumer sentiment, while also further strengthening its strong branding position.

Export sales rebounded, registering year-on-year and q-o-q growth of 20.6% and 19% respectively in 3QFY15. Instead of forex advantage, the group attributed the recovery to new product launches, while key export products were those in the Maggi, Nescafe and confectionery segments.

Moving forward, a new confectionery product, Kit Kat Green Tea, which has received positive response in the local market, will be exported to neighbouring countries, including Thailand, Vietnam, the Philippines and Indonesia. Thus, the group expects growth momentum to be sustained, while foreseeing FY16 to record positive export sales growth.

The operating margin was able to expand 1.2 percentage points, thanks to favourable commodity prices which led to lower raw material costs for Nestle. The management indicated that the two most notable key raw materials that have been most favourable in terms of price movements are milk powder and coffee powder.

Moving forward, the group expects more stable price movements in FY16, and thus discounting the possibility of price increases of its products in view of the sensitive consumer sentiment. Cost savings from raw materials will be reinvested in marketing activities to stimulate the subdued sentiment.

The group declared a second interim dividend together with the results announcement, which was surprising to us as it usually pays dividends twice a year — in 2Q and 4Q. The management clarified that this is a new dividend payment schedule for Nestle to reward its shareholders on a more regular basis. Thus, we made no changes to our dividend forecasts.

Our TP is based on 27 times FY16 (estimate) earnings per share, which is in line with +0.5 standard deviation five-year mean. We maintain our neutral stance on the company as we like its strong brand name and innovative marketing, which are essential in sustaining growth in view of the subdued local consumer sentiment. However, we think that its valuation is at the higher end, while a dividend yield of 3.5% to 3.7% is only average. — Kenanga Research, Oct 26

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