Target RM75.83 (Stock Rating: ADD)
NESTLE (4707) NESTLE (M) BHD
We are cutting our average CPO price forecasts by 5-11% for 2014-16 to reflect larger-than-expected global edible oil supplies as well as weaker demand for biodiesel usage in Indonesia. The CPO price declines in 3Q14 were sharper than what we had previously expected, no thanks to stronger soybean supplies and weaker Chinese demand. These factors, coupled with the recent sharp drop in crude oil prices, are likely to put a lid on near-term CPO prices. We cut our EPS forecasts for regional planters by up to 41% to reflect our CPO price downgrade. This lowers our target prices by up to 23% across the board. But we have upgraded six stocks as their valuations have improved. Our sector rating remains Neutral, with First Resources as our key pick.
9M results impacted by 1H’s higher costs
Nestle’s 9MFY14 revenue grew by 1.4%, while net profit inched down 2% yoy. The stronger topline was driven by solid domestic sales, but export sales came in lower yoy due to softer demand from affiliated companies. This was expected given that Nestle had previously guided that it would continue to see weaker export demand as its affiliate companies manufacture more products for themselves after attaining a certain scale. In the domestic market, confectionary, liquid drinks and ice cream registered solid sales growth. Despite the better yoy topline growth, net profit was lower yoy, mainly due to 1H’s higher raw material costs and larger A&P expenses to boost sales. Aside from the conventional A&P expenses incurred during the Ramadan month and its own “Lebih Kebaikan, Lebih Nilai” campaign in Mar-Apr 2014, the company also incurred more A&P expenses in conjunction with the World Cup. The higher operating costs caused its EBITDA margin to drop by 0.3% pts yoy.
3Q14’s results improved yoy
Compared to 3QFY13’s numbers, revenue dropped 4.2% but net profit grew 9.9%. The top line was mainly impacted by lower export sales, while net profit was boosted by (i) easing commodity prices, (ii) the stronger RM against US$, (iii) the full impact of the cost past-through, and (iv) lower marketing expenses, which in turn led to a stronger 3QFY14 EBITDA margin of 19.4% vs. 17.2% in the corresponding period last year. The lower effective tax rate of 20.9% in 3QFY14 vs. 23% in 3QFY13 also helped to improve bottom line growth.
Source: CIMB Daybreak - 28 October 2014
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