Target RM75.09 (Stock Rating: ADD)
Nestle highlighted during its analysts’ briefing today that although domestic sales grew by only 5.8% yoy, the company considers the achievement encouraging as the growth rate was above industry average. To boost profits, it will continue to focus on increasing its operating efficiency. We trim our FY14-16 net profit forecasts by 0.3-0.6% to factor in the higher capex as guided by management. This reduces our DCF-based target price. We maintain an Add rating on the stock given its strong branding, solid delivery track record and superior ROE. Key rerating catalysts include a positive impact from the cost pass-though and easing raw material prices.
What Happened
We attended Nestle’s 9MFY14 briefing today hosted by the new country Finance & Control Executive Director Martin Kruegel who was appointed to the company on 1 October 2014. He has held various senior positions in other Nestle markets since he joined Nestle in 1995. Approximately 40 analysts attended the briefing. The key takeaways were (i) domestic sales remained encouraging despite the weaker consumer spending environment, (ii) the company will focus more on increasing operating efficiency to counter the negative impact from slower export sales and inflationary pressure, (iii) the Sri Muda manufacturing plant is targeted to commence operations in 1H2015, and (iv) capex in 2014 will be higher than RM320m.
What We Think
Apart from the higher capex guidance, there were no surprises from the briefing. We concur with management’s view that although its domestic sales grew by only 5.8% yoy, it was encouraging considering the weaker consumer spending environment. If not for the weaker export sales, we believe its 9M performance would have been stronger. Although 9M net profit was still lower yoy due to the higher operating cost (A&P expenses and higher raw material prices) in 1H, 3Q net profit grew 9.9% driven by lower raw material prices, marketing investment and full impact from the cost past-through. We expect the earnings momentum to continue in 4Q due to the positive impact from cost pass-through and as raw material prices continue to decline. Sales volumes could also be higher in 4Q driven by year-end festivities.
What You Should Do
Accumulate. Despite the superior ROE and strong fundamentals as well as brand name, the company is trading at 23x CY15 P/E which is only a 10% premium to the sector average. Dividend yield is also decent at ~4%.
Source: CIMB Daybreak - 29 October 2014
