This article first appeared in The Edge Financial Daily, on May 6, 2016.

Nestle (Malaysia) Bhd
(May 5, RM74.50)
Maintain hold with an increased target price (TP) of RM79.80: We attended last Friday’s analyst briefing and came away impressed with the growth potential in Nestle (Malaysia) Bhd. Revenue for the first financial quarter ended March 31, 2016 (1QFY16), was higher year-on-year despite a higher base in 1QFY15 due to pre-goods and services tax stocking activities by consumers. This was boosted by aggressive advertising and promotional campaigns together with new launches in FY15, which allowed Nestle to benefit from the spillover effect in 1QFY16. Aided by low commodity prices, 1QFY16 net profit margin increased 16.8%.

We expect Nestle to register an improved double-digit growth of 16.4% in its profit before tax (PBT) margin in FY16. The company registered a PBT margin of 21% in 1QFY16 compared with 19% in 1QFY15. This was an impressive achievement because it was the highest PBT margin for the past five quarters. The results for 1QFY16 were also supported by lower commodity prices and reduced operating expenses due to the company’s diligent cost management.

We remain positive on Nestle’s future performance as the rebound in the Consumer Sentiment Index will further assist revenue growth. As a result of the improved quarterly performance, we have revised our FY16 and FY17 net earnings forecasts to RM685 million (+6%) and RM732.9 million (+2%) respectively. We have derived a new TP of RM79.80 (from RM77.80 previously), using the dividend discount model methodology (weighted average cost of capital: 8.3%). However, the stock remains a “hold” as the TP of RM79.80 represents an upside of 6.5%. — BIMB Securities Research, May 5