Nestle Malaysia Bhd
(Oct 28, RM68.50)
Maintain neutral with unchanged target price of RM70.55: Net profit for the first nine months of financial year 2014 ending December (9MFY14) came in broadly within our and consensus expectations, accounting for 77.5% and 76.0% respectively of full-year estimates. Revenue declined due to the softer demand for some of its export categories. In particular, lower exports to the Philippines and Indonesia as both have invested in their own local manufacturing facilities.

Despite a drop in revenue, lower marketing investments in the third quarter (3Q) of FY14 helped to reduce its overhead expenses. This has in turn improved its operating margin during the quarter.

Contributing to this was the timing of its marketing expenses. Comparatively, its marketing expenses for 3Q were much lower than in the earlier two quarters of FY14.

Operating margin for 9MFY14 declined by 0.4 percentage point, largely attributed to the aggressive marketing investments seen in the first two quarters of FY14. The group’s aggressive promotional campaigns helped to drive up its revenue. We opine that the promotional campaigns undertaken by the group were necessary to maintain its market share in light of intensifying competition and moderating domestic demand.

Some raw material prices have started to ease in 3Q. This will lead to a more favourable yearly average price, which is expected to marginally improve its gross margin.

We are maintaining our “neutral” recommendation on the stock with an unchanged target price of RM70.55. Our valuation is based on the dividend discount model, under the assumption of 7.3% cost of equity and long-term growth rate of 3.0%. — MIDF Research, Oct 28

This article first appeared in The Edge Financial Daily, on October 29, 2014.